Mutual Fund Total Costs

Mutual funds have to be shopped carefully. The fundamental differences among funds, aside from investment class and specialty, is cost. The lower the cost of operation, the better the fundamental choice. Relative cost makes a lot of difference in accumulated investment value over the years.

The average expense ratio for all mutual funds is about 1.3% 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 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 are they mentioned in the prospectus, They are in the fund’s Statement of Additional Information,)

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.