Sales charges, fund fees and performance matter except when they don't
By Dian Vujovich
When I first got into the brokerage business the front-end load, i.e. sales charge, on stock funds was roughly 8.50 percent. Now that’s all changed—it’s much lower. And while everyone knows that after a sales charge is dealt with fees of any type—maintenance, service and others—take away from one’s returns. But, when the market is hot and investors are making a bundle from a particular investment, fees don’t seem to matter quite as much.
Hedge funds, for instance, have fees galore pilled on them and investors don’t typically mind no matter what’s going on in the markets because their hope for big fat returns exceeds that of their concern of high fees and expenses.
At the other end of the sales charge spectrum are no-load funds. They don’t have a sales charge. Within that group, fixed-income funds typically have the lowest maintenance fees.
It would be sweet if fee talk of any type stopped there but it doesn’t: Every year someone who is a mutual fund shareholder pays annual fees for the management costs and expenses of running the fund. And every year those fees impact an investor’s return no matter if that particular fund has gone up or down in value, i.e., net asset value (NAV).
Every year Lipper also comes out with their “Lipper Quick Guide to Fund Expenses” report.
While it’s real easy to wind up in the woods with respect to understanding fund fees and expenses—there are average expenses and asset weighted ones on the various fund types—I’m going to use the average figures rather than asset weighted ones.
So for the record, the annual average total expense ratio for actively and passively managed open-end equity funds in 2012 was 1.3 percent; for ETFs around 0.9 percent; for fixed-income funds around 0.9 percent; and money market funds almost 0.2 percent, according to Lipper. Again, those are average annual fee ratios. In your investment world, the fees charged would vary depending upon the type of fund(s) you’ve money invested in. Fund of fund fees, for instance, can be higher. So can those on international and world funds and annuities too.
Back to that sales charge—-likely the first expense you’ll become familiar with— the Investment Company Institute’s Fact Book states the highest sales charge allowed for open-end mutual funds is 8.5 percent. Fortunately, not a lot of funds charge that much: In 2011, the average load (sales charge) on stocks funds was 5.4 percent, for bond funds 3.9 percent and hybrid-funds, 5.2 percent.
Again, that sales charge is a one-time fee paid either when purchasing or liquidating fund shares. It isn’t an every year fee like a fund’s annual management and expense fee is. Whew for that!
As I wrote earlier, fees are important but when Mama’s funds are stellar performers, it’s a lot easier to cast a blind eye toward them. When the market is in the tank and a fund’s NAV is plummeting, or regrowing, fees are another story.
John Bogle, founder of the Vanguard Group, has made a fine living and a wonderful case teaching people about the benefits of low-cost mutual fund investing. His words are wise ones but there’s more to making money in mutual funds than focusing only on a fund’s sales charge and its annual expense ratio.
As important are things like who is managing the fund, how long they’ve been doing so, and what has their performance track record been, and how is the fund currently performing. Then there are the questions for you like why did you select this fund, what kind of returns are you expecting and how long do you intend to stay a shareholder?
The you questions are the most important.
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