Technology now provides
investors far more information than was available just 5 years ago. This additional
information raises a question: What’s information is important- and what’s not?
For mutual fund investors, it’s critical to understand mutual fund costs. The
best source for this information is your mutual fund’s Summary Prospectus.
You’ll can download this document from your fund’s website.
I’ll divide the cost of
buying and holding a mutual fund into several parts:
Sales Load: The sales load is a commission paid for
a mutual fund. That load may be paid when you purchase the fund or when you
sell the fund. The load may also be paid each year, for a stated number of
years. Fortunately for investors, competition has forced down the sale loads
charged by mutual funds.
Expense Ratio (Management Expense Ratio): This is a fee to cover
the annual cost of operating the mutual fund. The fee covers expenses for
recordkeeping, tax and legal costs, and for a custodian. The custodian
takes physical custody of the assets in the fund. Custodians send statements to
investors, which document what they own and the investment’s value. The expense
ratio is calculated as percentage of the assets the fund has under management.
12B-1 Fee: This is an ongoing fee to compensate the marketing and
salespeople who sell the fund. The majority of this fee goes to the salesperson
who sold the fund to the investor. Financial advisors refer to these payments
are trailers.
Since the salesperson must oversee the investment and answer customer
questions, they are paid a trailer or trail commission each year.
Reducing Your Costs: One way to reduce your mutual fund costs- and
still maintain diversity in your portfolio- is to take advantage of breakpoints.
A breakpoint is a quantity discount, based on the total dollar amount of
investments in a particular mutual fund family. American Funds, for example, is
a mutual fund family. They have dozens of mutual funds, each with a different
investment strategy. An investor could purchase a variety of funds within
American Funds and create a diverse portfolio (Blue chip stocks, speculative
stocks, bonds, etc.) The mutual fund looks at the total dollars invested in the
fund family. Based on the dollar amount, the sale load may be lowered for each
purchase over a given dollar amount. For example, American Funds might lower
the sales load for every dollar invested over $250,000.
Take the time to review
the Summary Prospectus for your mutual fund. You need to understand the cost of
your fund, and how the cost is incurred each year. If you educate yourself,
you’ll know exactly what’s coming out of your wallet when you invest.
You’ll find a variety of
finance and accounting videos linked to my website, as well as my Lynda.com
videos and my webinars for Financial Time’s ExecSense website:
Good luck!
Ken Boyd
St. Louis Test
Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA
Exam for Dummies (Sept. of 2014) and
1,001 Accounting Questions for Dummies (2015)
(amazon author page) amazon.com/author/kenboyd
(cell) (314) 913-6529
(email) ken@stltest.net
(website) www.stltest.net
(you tube channel)
kenboydstl
(facebook) St Louis Test
Prep
(twitter)
@StLouisTestPrep
(linked in) https://www.linkedin.com/pub/ken-boyd/17/163/286
Author: Lynda.com,
Personal Finance Fundamentals (Summer of 2014)
Instructor: Financial Times/ ExecSense Webinars
creative commons licensed
(CC BY 4.0) flickr photo by Ozge Okcuer:
https://www.flickr.com/photos/ookcu/6868408831/
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