Mutual Fund Expenses

[collegeguy]

For mutual funds if you have an Expense Ratio of say 1.5%, how
does that get applied? In other words, when do you actually pay that expense, and what's it applied against? Do you pay 1.5% of the value of the holding or 1.5% of the value of the growth for that year?

And in terms of Load fees, if there's no front-load, then you don't pay when you purchase, but if there's a back-end load, at say 5%, do you pay 5% of the growth you experienced when you sell? Is that how that works?

[jIM_Ohio]

Loads and expenses are different in terms of your question. Both hurt return, but are calculated differently.

expense ratios are applied to NAV (net asset value) of fund. You don't see your "return" drop, because it's applied before returns make it to your account value.

Example

Assume you have 10,000 in a mutual fund
Assume expense ratio is 1.5%
Assume stated return is 10%

At end of year your balance shows $11,000.
The actual amount made was $11150.

$150 was taken out as expenses (1.5%) before you even saw it in your account. This is over simplified, though.

Because it assumes the 10% return came on one day and expenses were taken out on same day.

The reality is 1/260 of expenses are taken out each day before NAV is calculated.
The NAV above could have been 10,000 (you owned one share) or a $1 (you owned 10,000 shares) or probably was something in between. In this case the expense is still taken from NAV, but the math would be more complex.

For loads, those are sales charges.

A shares have a front end load. That means when you put in $10,000, you paid 5% (typical load)- $500. Meaning $9500 shows up as NAV in mutual fund and $500 went into salesmans pocket.

B and C shares pay different loads (when you sell shares). A shares frequently get a lower expense ratio.


Number one goal is to maximize return for a given risk. Expenses take away from the return. So when executing a strategy, consider the expenses as part of it, but make sure you know what you are or are not paying for.

Most of my mutual funds have expense ratios around .7%. They are managed funds. For me to get lower expenses I need to choose index funds, and that won't happen most of the time (me choose an index fund). I believe that a fund manager is worth the extra .4% expenses (index funds have expense ratios between .1% and .3% last time I looked).

In many years I beat the index by well more than .4%, so my fund managers know what they are doing.

That being said, if a person wants to do minimal research and not think about things, index funds do have a good place. You could do a lot worse than choosing an index fund. Much worse.

You could do better, but it takes work- some done on my end, and some done by the fund manager.

[kv968]

A shares have a front end load. That means when you put in $10,000, you paid 5% (typical load)- $500. Meaning $9500 shows up as NAV in mutual fund and $500 went into salesmans pocket.

B and C shares pay different loads (when you sell shares). A shares frequently get a lower expense ratio.

Actually "C" shares have no load but you'll pay a continuing higher expense ratio. The back-end loads on "B" shares typically decline the longer you hold the fund and normally reach zero after 7-8 years. At which time they may even be converted to the lower expensed "A" shares depending on the company.

All said and done, I'd say stay away from the "alphabet soup" of classes and just buy no-load, reasonably expensed funds.