Mutual Fund Total Costs

Mutual funds have to be shopped because the fundamental differences among funds, aside from their investment class and specialties, is their cost. The lower the cost of operation, the better they are fundamentally. Relative cost makes a lot of difference in accumulated investment value.

The average expense ratio for all mutual funds is 1.32% per year. Many charge more than 2% This covers only fixed costs, such as salaries, marketing and overhead.

Then, there are variable costs such as brokerage commissions and the cost of trading spreads. While funds pay lower commission rates than you, the more the fund trades, the more it spends on brokerage. And the less you earn. Those expenses are not included in the Expense Ratio or in the prospectus, but are in the fund’s Statement of Additional Information, not in the prospectuses

In 2007, an analysis by researchers at Virginia Tech, the University of Virginia, and Boston College, in a sample of 1,706 U.S. equity funds from 1995 to 2005, found the average fund had annual trading expenses of 1.44% per year Added to the 1.32% average expense ratio for funds, the average mutual fund expense ratio becomes a total cost of 2.76% per year.