Mutual Fund Expenses
884
Finance > Mutual Funds
Mar 1, 2007
Sachin A
Mutual Fund Expenses
An informed investor knows where his money is going. For an investor in mutual funds, it is essential to understand the expenses of mutual funds. These expenses directly influence the returns and cannot be neglected.
The expenses of mutual funds are met from the capital invested in them. The ratio of the expenses associated with the operation of the mutual fund to the total assets of the fund is known as the ?expense ratio.? It can vary from as low as 0.25% to 1.5%. In some actively managed funds it may be even 2%. The expense ratio is dependant on one more ratio ? ?the turnover ratio?.
?The turnover rate? or the turnover ratio of a fund is the percentage of the fund?s portfolio that changes annually. A fund that buys and sells stocks more frequently obviously has higher expenses and thus a higher expense ratio.
The mutual fund expenses have three components:
The Investment Advisory Fee or The Management Fee: This is the money that goes to pay the salaries of the fund managers and other employees of the mutual funds.
Administrative Costs: Administrative costs are the costs associated with the daily activities of the fund. These include stationery costs, costs of maintaining customer help lines and so on.
12b-1 Distribution Fee: The 12b-1 fee is the cost associated with the advertising, marketing and distribution of the mutual fund. This fee is just an additional cost which brings no actual benefit to the investor. It is advisable that an investor avoids funds with high 12b-1 fees.
The law in US puts a limit of 1% of assets as the limit for 12b-1 fees. Also not more than 0.25% of the assets can be paid to brokers as 12b-1 fees.
It is important for the investor to watch the expense ratio of the funds that he has invested in. The expense ratio indicates the amount of money that the fund withdraws from the funds assets every year to meet its expenses. More the expenses of the fund, lower will be the returns to the investor.
However it is also essential to keep the performance of the funds in mind too. A fund may have higher expense ratio, but a better performance can more than compensate higher expenses. For example, a fund having expense ratio 2% and giving 15% returns is better than a fund having 0.5% expense ratio and giving 5% return.
Investors should note: It is not sensible to compare returns of funds in different risk classes. Returns of different classes of funds are dependant on the risks that the fund takes to achieve those returns. An equity fund always carries a greater risk than a debt fund. Similarly an index fund that invests only in relatively stable and thus less risky index stocks, cannot be compared with a fund that invests in small companies whose stocks are volatile and carry greater risk.
Avoiding funds with high expense ratio is a good idea for the new investor. The past performance of a fund may or may not be repeated, but expenses usually do not vary much and will certainly reduce returns in future too. Know more about mutual funds at www.completeonlinetrading.com
The expenses of mutual funds are met from the capital invested in them. The ratio of the expenses associated with the operation of the mutual fund to the total assets of the fund is known as the ?expense ratio.? It can vary from as low as 0.25% to 1.5%. In some actively managed funds it may be even 2%. The expense ratio is dependant on one more ratio ? ?the turnover ratio?.
?The turnover rate? or the turnover ratio of a fund is the percentage of the fund?s portfolio that changes annually. A fund that buys and sells stocks more frequently obviously has higher expenses and thus a higher expense ratio.
The mutual fund expenses have three components:
The Investment Advisory Fee or The Management Fee: This is the money that goes to pay the salaries of the fund managers and other employees of the mutual funds.
Administrative Costs: Administrative costs are the costs associated with the daily activities of the fund. These include stationery costs, costs of maintaining customer help lines and so on.
12b-1 Distribution Fee: The 12b-1 fee is the cost associated with the advertising, marketing and distribution of the mutual fund. This fee is just an additional cost which brings no actual benefit to the investor. It is advisable that an investor avoids funds with high 12b-1 fees.
The law in US puts a limit of 1% of assets as the limit for 12b-1 fees. Also not more than 0.25% of the assets can be paid to brokers as 12b-1 fees.
It is important for the investor to watch the expense ratio of the funds that he has invested in. The expense ratio indicates the amount of money that the fund withdraws from the funds assets every year to meet its expenses. More the expenses of the fund, lower will be the returns to the investor.
However it is also essential to keep the performance of the funds in mind too. A fund may have higher expense ratio, but a better performance can more than compensate higher expenses. For example, a fund having expense ratio 2% and giving 15% returns is better than a fund having 0.5% expense ratio and giving 5% return.
Investors should note: It is not sensible to compare returns of funds in different risk classes. Returns of different classes of funds are dependant on the risks that the fund takes to achieve those returns. An equity fund always carries a greater risk than a debt fund. Similarly an index fund that invests only in relatively stable and thus less risky index stocks, cannot be compared with a fund that invests in small companies whose stocks are volatile and carry greater risk.
Avoiding funds with high expense ratio is a good idea for the new investor. The past performance of a fund may or may not be repeated, but expenses usually do not vary much and will certainly reduce returns in future too. Know more about mutual funds at www.completeonlinetrading.com
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
An inormed investor knows where his money is going. For an investor in mutual unds, it is essential to understand the expenses o mutual unds. These expenses directly inluence the returns and cannot be neglected. The expenses o mutual
Category:
Ech one of us does not hve the expertise or the time to build nd mnge n investment portfolio. There is n excellent lterntive vilble ? mutul funds. A mutul fund is n investment intermediry by which people cn pool their money
Category:
Load is defined as the fee or the commission that an investor pays to a mutual fund at the time of purchasing or redeeming the shares of the mutual fund. If the commission is charged when the investor buys the shares, it is known as a
Category:
No two persons gree on ll things. When people come together to work out del, they try to mximize their benefits nd minimize their costs. Ech person plces different vlue on individul elements of the del.An effective negotition is not just
Category:
Other links at Finance > Mutual Funds
We have all heard the advantages of investing in a mutual fund over trying to pick individual stocks. First of all mutual funds hire professional analysts that are market experts and out many hours of study to the various stocks. Unless you want to
Category:
Copyright 2006 Equitrend, Inc. Many investors still don't know about Exchange Tred Funds (or ETFs) and their vantages over tritional mutual funds. In this article, we'll examine Exchange Tred Funds, their history, performance and
Category:
Switching your job? Retiring? Congratulations! A window of opportunity opens for you with the Rollover Individual Retirement Account or Rollover IRA. In an era of corporate restructuring and outsourcing, Rollover IRA is among the most
Category:
There are a number of companies that handle investment for clients both large and small. Evergreen Mutual Funds is one such company. Falling into the mid- to large-size range as far as investment companies are concerned, this company provides its
Category:
The stock markets are rising; fund houses are having a field day with rising assets under management and new fund offer launches, and are back in action. It?s perceptible in the communication from fund houses. We regularly interact with fund houses and sa
Category:
Site Sponsor
Directory Statistics
Articles: 68222
Categories: 501
Yahoo Entertainment
