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This video explains how the fees you pay in your #mutual #funds are much more expensive than you think.
Something pretty much all investors know (whether they invest for dividends or not) is that mutual fund companies make money from the fees they charge investors. However, few investors realize just how steep their fees truly are. In this video, we will explore this topic in greater depth in order to increase your awareness of what and how much you are paying fund managers to handle your hard-earned money.
Fees usually fall into two categories: ongoing fees and transaction fees.
Ongoing fees are sometimes referred to as the fund’s expense ratio, often listed as a percentage. For example, if a fund’s expense ratio is 0.75%, it means that for every $1,000 invested into a fund, $7.50 is deducted from your investment’s total value each year. These fees typically cover the fund’s management (i.e., the salaries of the fund’s portfolio research and management team and profit for the fund’s sponsor), record keeping and accounting, marketing, customer service, and legal costs. Expense ratios are typically fixed, meaning that as your account value changes, so do your fees. However, if a fund shrinks too much in total assets under management, it might be forced to raise its expense ratio in order to cover costs and vice versa due to achieving economies of scale.
Additionally, investors must beware of additional fees that accrue in addition to their expense ratio fee. These typically fall under the second category of fees: transaction fees.
Unlike ongoing fees, transaction fees are one-time expenses you pay any time you buy or sell mutual fund shares. These costs are also sometimes referred to as shareholder fees or individual expenses. These often include sales commissions (when you buy fund shares), redemption fees (when you sell fund shares), exchange fees (transferring money from one fund to another), and account service fees (account maintenance fees, especially if the account total falls below a specified threshold). As a result, the more you tinker with your account, the more fees you pay.
While these fees can often seem negligible relative to the overall value of your portfolio, the laws of compounding means that they can really add up over time. This means that even a few higher basis points in fees paid per year can have a meaningful impact on your retirement nest egg. To illustrate, let’s look at an example. Say you’re 30 years old when you start saving for retirement and you open your account with $10,000, adding $10,000 every year until retirement at age 70 with an average annual return of 6%. If one account has a 1.25% expense ratio, the total retirement nest egg would be $1.2 million whereas it would be $1.55 million ($350,000 higher!) if the expense ratio were just 0.25%.
As this example makes clear, every little bit of fees, when allowed to compound over decades, can have an enormous impact on your retirement fund, thereby significantly influencing the lifestyle you can enjoy in your golden years as well as the amount of wealth you can pass on to your heirs. As a result, investors are best served in finding the lowest cost funds they can, or even better, if they have the passion and know-how, picking dividend growth stocks with strong competitive advantages that will compound wealth for years to come without paying any fund management fees at all.
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