Here is an important way to look at "mutual fund fees"...
Every mutual fund and exchange-traded fund has an "internal fee". There is no escaping that. It is how the fund companies get paid. It is usually called the "expense ratio" or the "management fee".
This cost is added to losses or deducted from gains experienced by the fund's portfolio. The internal fee is supposed to be included in the performance data published by the fund company, so you need not calculate it yourself when comparing two funds.
For example:
- If a fund has a 1.25% internal fee and the fund had a 10.00% return last year, that means the fund's portfolio gained 11.25% and 1.25% was kept by the fund company.
- Or, if that fund was down -8.75% last year, that means the fund's portfolio lost 7.50% and 1.25% more was taken out by the fund company.
- This is all normal and expected, just not always understood by investors.
Sure, we want to avoid over-paying for services, so we hear a lot about "low-cost" funds. But the bottom-line is cost-justification. A fund with an average annual return of 8.50% over the past 10 years (net of internal fees) was the better choice than a lower-cost fund that had, bottom-line, a lower return.
But it is hard to find funds that beat their benchmarks regularly and over the long-haul. So low-cost benchmark replicator funds (index funds and ETFs, for example) are popular.
I make it my business to find cost-justifying benchmark-beating mutual funds for my clients.
