The mutual fund industry sells performance but does not talk about cost. If you are invested in a mutual fund it may be up – but how much were you up? There are fees and transaction costs that you never see.
In many cases that 8% ROR is cut to 5% or less! What counts is how well you did after costs. Let’s look at some examples.
Most people think of Vanguard funds as being low cost. Lets take a look at what it costs to own this fund on an annual basis as well as over a 10 year period
(Sorry the image is a bit fuzzy – I had a devil of a time uploading the image from my software.)
This Vanguard fund would cost you roughly $49,604 over a 10 year period to own. That is rather expensive. Remember that this is a Vanguard Fund, it is supposed to be low cost. Imagine what the fund costs are of other funds that do not carry the same badge of “low cost”.
The fees above are broken down into several categories – the definition of each is below.
Transaction Costs – These are incurred by the fund as it buys and sells securities, it comes out of your account value and you will never see it.
Management fees – These fees are paid to the company that manages the investment portfolio. You will find this amount on the prospectus for your mutual funds.
Distribution Fees – These are paid to the broker or adviser that sells the fund and services the account.
Taxes – is the percentage of the ROR that were paid out for taxes.
This might seem confusing to you. Because that is the way that the mutual fund industry wants it. If you do not know the right questions to ask how are you going to get the right answers?