Chicago — U.S. investors have close to $12 trillion socked away in mutual funds, according to the Investment Company Institute. About 44 percent of U.S. households — or roughly 90 million investors — have a mutual fund investment. Despite a surge of withdrawals during the height of past market uncertainties, mutual funds clearly still remain a popular investment option for many people. If you are selecting a fund, it’s important to understand the costs of investing, which may not always be immediately apparent.
Understanding Mutual Funds
According to the Illinois CPA Society, mutual funds are essentially a pooled investment made up of the contributions of many individual investors. You buy shares in a fund and receive a return (or experience losses) based on how well the overall investment pool does in the market. The types of investment include stocks, bonds, money market, commodities or various hybrids. Funds may have a range of different purposes, including growth or income, and different levels of risk.
Considering Loads vs. No Loads
In some cases, it may be necessary to pay a commission — or a load — to buy or sell mutual fund shares. No-load funds, on the other hand, do not charge a commission. However, these funds may charge other fees or their expenses may be higher than those of a load fund with similar objectives. That’s why it’s always important to get the big picture when picking any investment
and avoid making a decision based on any one factor.
What’s the Expense Ratio?
This is an important consideration in evaluating a fund. In simple terms, the expense ratio is the cost of running the fund divided by the amount of assets in the fund. Expenses can include the fund manager’s fee and other overhead and administrative costs, such as taxes and legal and other fees. Not surprisingly, you are most likely going to want to look for a small ratio. That’s because the expenses are deducted from the total assets before they are invested. The smaller the asset amount, the lower the return the fund will get on that amount. That seemingly small loss can add up significantly over time. An average expense ratio for a mutual fund might be around 1.5 percent. For an index fund, which invests in a portfolio that mirrors a specific stock index, such as the S&P 500, the expense ratio may be significantly less — in some cases as low as about .20 percent.
Check Out Available Resources
To get a better sense of the costs of certain funds, you can turn to a fund analyzer on the site of the Financial Industry Regulatory Authority (FINRA) at http://apps.finra.org/fundanalyzer/l/fa.aspx, which analyzes over 18,000 funds, including the related fees and how they will affect your investment. In addition, the Securities and Exchange Commission (http://www.sec. gov/investor/tools/mfcc/mfcc-int.htm) also provides information
on how to calculate and consider mutual fund fees and expenses.
Find Out About Mutual Funds
To learn more about the ins and outs of mutual fund investments, visit www.360financialliteracy.org. The site also provides useful information about a wide range of other financial issues.