How Much Does it Cost to Own a Mutual Fund?
Mutual funds are a smart investment, and most people look forward to a comfortable retirement. However, a majority of the investors do not understand the total cost to own a mutual fund. In order to simplify the complications of mutual fund expenses, there are a few things to consider. This will help you to discover the true costs relevant to mutual fund ownership. There are six different costs that needs to be evaluated for knowing how much does it cost to own a mutual fund.
Lot of investors believes that expense ratio is the only cost that needs to be paid when owning mutual fund. This cost is mainly used to pay marketing price, distribution cost and management fees. This cost can be known through reading prospectus of mutual funds. The average stock fund cost around .90% per year on the basis of Morningstar article.
Mutual funds average around 1.44% in transaction costs per year. This cost is not easily determined and usually it is not found in the prospectus. The conscious investors break down these transactions cost in three categories that is brokerage commissions, market impact and spread cost.
Lots of investors pay high than their fair share in taxes at the time of owning mutual funds. Prior to buying actively managed mutual fund in taxable account the investor needs to consider contacting the company to know the embedded gains in the mutual funds. The average tax cost ratio for stock fnds is around 15 to 1.2% every year.
One more cost involved in owning mutual fund is cash drag. Cash is usually held through the mutual fund managers to maintain liquidity for targeted transactions and targeted redemptions through mutual fund owners. This might suppress performance of mutual fund if stock rises in value higher than the cash held.
Soft dollar cost
One of the difficult expenses of mutual fund that needs to be estimated is soft dollar cost. This cost plays a role when managers of mutual funds are buying and selling stock with the brokerage accounts. The manager of these funds gets special services or research and the company gets brokerage business at a premium price.
The final cost is related to people working with fee-based financial or investment advisors that select mutual funds for their customers. Lot of fee-based advisors will manage the investor’s portfolio by charging annual fee which ranges from .25% to 0.25% of the portfolio balance. This fees needs to be disclosed on the investors statement and it will be charged additionally to other mutual fund cost.