Hidden Mutual Fund Fees Can Eat Away at Your Returns

by Lita Epstein, MostChoice.com

You may think a 2% fee for managing your mutual fund doesn't seem so bad, but think again. As you can see in the chart below that 2% total fees will result in $28,464 less in your portfolio for a $10,000 initial investment held over 20 years with an average return rate of 12% compared to the same investment deposited in an index fund with total fees of 0.19%. These numbers don't even consider the impact of a front or back sales load, which of course would mean an even greater loss in growth opportunity. These numbers were developed using the US Securities and Exchange Commission's (SEC) Calculator.  The calculator does allow you to factor in sales loads.

Here's the breakdown. Let's say you put $10,000 in an index fund with yearly total fees of 0.19%. Over a 20 year period the total costs would be $1,496. In addition to these costs there are foregone earnings of $2,104 over a 20 year period, which would have been earned by the $1,496 if there had been no fees. Now compare this to an aggressive mutual fund that has annual fees of 2%, which would translate to $12,485 in total costs plus $19,578 in forgone earnings on these costs. The charts below look at the impact of fees ranging from .19% to 2% on a $10,000 investment held for 10 and 20 years at a 12% annual rate of return.
 

It's easy to use and gives you the ability to quickly compare the impact of fees being charged by the mutual funds you are considering. It takes the mystery and math out of the equation and shows how large a chunk mutual fund costs can take out of your investment return. Remember costs are not the only things to consider when selecting a fund. Other key factors include the number of years needed to reach your investment goal, types of funds you want to buy, your risk tolerance level, the fund's performance, and the fund manager's track record.