Impact of Investment Fees
Course Section
As an investor, you are likely trying to accumulate funds towards a particular savings goal. Therefore, it is important that you periodically review the performance of your investments. Your primary focus will be the investment return. However, you should not stop there. You should also review the internal expenses, or fees, of each of your investments.
For example, mutual funds have fees that are expressed as a percentage, such as .4% or 1.25%. This represents the cost of the management and administration of the mutual fund. So, if you invest $1,000 in a mutual fund with a .4% fee, $4 would go towards internal expenses. If the mutual fund’s expense was 1.25%, the cost would be $12.50. Over time, these differences in cost can really add up.
When a mutual fund reports its investment return, it is after all fees are taken out. Should you be concerned about fees as long as the mutual fund is producing investment returns on par with the other fundsin its peer group? The answer is “yes”. When the market is going up, these fees may be easy for a fund manager to overcome and you still see your investment grow. But, what about during a bad market? When investment returns are harder to achieve, a mutual fund with higher than normal expenses may under perform other mutual funds within its peer group.
Fees will vary with the type of mutual fund. For example, an index fund, which simply owns the individual stocks as represented by a particular index, will have very low fees. This fund is not paying an investment manager to make investment decisions. On the other hand, an international mutual fund will have higher fees reflecting the need to pay the fund managers for their selection expertise as well as the added expense for research and administration of the fund.
Be a wise investor. Take the time to look beyond just the investment return to the fees. That way you will have more of your money working for you.
Elaine Bedel, CFP®, is a personal financial planner with over 25 years of providing financial planning and investment management for executives, professionals, and entrepreneurs. She is the President and Owner of Bedel Financial Consulting and has served as Chair of both the Financial Planning Standards Board and Certified Financial Planner Board of Standards.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
AARP Resources
Investing
Basics
Learn more about sound investment basics.
Mutual
Fund Research
Links to easy ways to research mutual funds.
Index
Funds
How index funds work.
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The
SEC Cost Calculator estimates the cost of investing in a mutual
fund based on information you provide. You’ll want to compare
the results for several funds or different classes of a single fund.
Before you begin, take out the prospectus or profile for the funds
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expense section of these documents.
