Understand How Mutual Fund Fees Affect Your Portfolio

How Do Mutual Fund Fees Affect Your Portfolio?

If you have a 401(k) plan through your employer, chances are that you’ve already acquired mutual funds as part of your retirement savings. And while it’s unlikely that you paid a commission to acquire those funds, you should be aware of the overall costs in holding these funds.

Funds charge fees, which directly affect your overall return. The higher the fees, the higher the impact.

“Nobody has a crystal ball, so we can’t predict market performance,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “Fees, on the other hand, are disclosed upfront and should be evaluated in context of your broader investment goals.”

Generally speaking, mutual fund fees will either be transactional or operational.

Transactional Fees

Some funds charge sales fees or “loads.” These sales charges can be levied at the time shares are purchased (typically called a front-end load) or when shares are sold (back-end load). (These fees are separate from brokerage commissions, which are collected by brokerage firms like Scottrade when shares are purchased.) Funds that do not impose a sales charge are called no-load funds.  

Most funds offer front-end or back-end load options. Others offer deferred sales charges, which can be reduced or eliminated if you hold the shares for a certain length of time. While the various types of load options might seem arcane and confusing, the mutual fund industry has standardized them by creating share classes common to all funds. Each share class represents a different type of load option. Class A shares, for example, are pure front-end load funds.

You should read a prospectus for each fund to understand the classes available and how loads are imposed for each share class. 

Operational Fees

Funds can impose several types of fees to offset their costs, and they report the total amount collected as an annual expense ratio. This ratio is the amount collected in one year divided by the total assets in the fund. A fund’s overall return to investors is reduced by the amount of the expense ratio. For example, if a fund’s holdings grew by 5% in a year, and the fund imposed an expense ratio of 1%, fund investors would see an increase of 4%.

Finding Mutual Funds

Scottrade maintains a free screening tool to anyone, and a more robust tool for clients that filter among thousands of mutual funds, including more than 2,500 no-load and no-transaction-fee funds. You can also arrange your screened list of funds based on expense ratios.

“Mutual funds are extremely popular investments for the public, and they should be,” said Correnti. “They can offer built-in diversification and there are many excellent funds to choose from. But no one should view them as no-brainers. Fees matter, and investors should take the time to understand the cost of buying and holding mutual funds.”

Read Next: See how your savings and time can add up with compounding interest

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Investors should consider the investment objectives, risks, charges and expenses of a mutual fund before investing.  A prospectus contains this and other information about the fund and may be obtained online or by contacting Scottrade.  The prospectus should be read carefully before investing.

No-transaction-fee (NTF) funds are subject to the terms and conditions of the NTF funds program. Scottrade is compensated by the funds participating in the NTF program through recordkeeping, shareholder or SEC 12b-1 fees.

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