Mutual Funds Fees Have A Big Impact On Your Investment
Investing in mutual funds is like buying a € 3 candy bar and paying € 5 shipping and handling. All mutual funds are not created equal, and you can boost your returns by doing a little homework before investing in them. When choosing mutual funds, avoid funds with loaded sales charges, high expenses, or a high turnover rate.
Mutual funds that carry a sales charge are called "loaded" funds. The IFA/broker who "sells" you these funds earn his living off the sales charges. There are several types of "loaded funds."
"A" shares are FRONT-LOADED. They charge a fee each time you buy them (about 4-6%). "B" shares are BACK LOADED. They charge a redemption fee if you sell the fund within a certain number of years. While they hold your investment hostage they often charge significantly higher other fees. "C" shares are LEVEL LOADED. They have no front or back end loads, but their yearly fees are too expensive for them to be called "no-load." Avoid all loaded funds and buy only "no-load funds." Look for direct-marketed mutual funds because they are offered to you without any fee! expatwealthatwork only offers "no-load funds", with no sales fees or loads deducted from your investment to pay a sales commission.
All mutual funds, regardless of whether they are load or no-load, have management fees and operating expenses. Look for a fund with a low management fee. What constitutes "low" depends on the type of fund. Index funds do not require as much research and should have low fees. Foreign and small cap stock funds require more research and may have higher expenses. A management fee of 0.5% is low. Management fees between 0.75% and 1.00% are typical. Aggressive and specialty funds will often have higher management fees (1% to 1.25%). You should select a mutual fund with expenses under 1.25%.
A mutual fund buys and sells securities on behalf of its shareholders. The frequency at which they change their holdings is called "turnover." "Turnover" is measured by the percentage of a portfolio's holding that are bought or sold each year. A mutual fund with 50% turnover changes half of its security holdings every year. Mutual fund turnover is bad, and now there is an objective study by Morningstar documenting how bad. Morningstar divided mutual funds into four groups from the highest turnover rates to the lowest. They found that the high turnover funds generated lower returns than the low turnover funds. In some categories the difference was as much as a couple of percentage points per year. You should select funds with a turnover rate under 50%. These four factors can provide a large financial drag on your investments. Choosing mutual funds with higher costs means your investments must gain an extra 3-5% a year to overcome expenses. When stocks were making 30% a year few investors noticed the difference, but in the current investment climate 3% a year is significant. After 20 years, a € 10,000 investment growing at 9% will be worth € 56,044. With 3% higher expenses it would only be worth € 32,071 !
Advice you can trust
If you rely on a commission-based financial product salesperson, you will be sold the wrong kind of funds. You can avoid these expenses by doing the research and purchasing no-load and low-expense ratio funds or you can seek the advice of expatwealthatwork, we are a Performance Fee-only financial adviser. Performance Fee-only financial advisers do not receive any commissions, and therefore act in only your best interest.