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Investing fees explained

August 22, 2012

Bonds

Investing fees explained

Article by Staff Reporter

It’s tough to navigate the stock market, but one thing you can control is the amount you pay to trade.

Mutual funds have expense ratios to pay for administrative services, investment advisory and other operating costs. These ratios vary by product.

Fees may not sound so bad at 1 percent or 2 percent, but they can take a big bite out of your returns.

1 percentage point difference in fees

Take, for example, a $ 10,000 investment that earns 8 percent each year before expenses for 20 years, and compare what would happen with the account if the money is invested in a fund with an expense ratio of 1.25 percent versus a fund with an expense ratio of 0.25 percent.

The investor who had just 1 percentage point higher in fees would forfeit $ 4,128 more in costs during the 20-year investment.

The final account balance would take a hit from the loss of compounding on the money that was instead incurred for expenses. The fund with a 1.25 percent expense ratio would have an ending balance of $ 8,000 less than if invested in the lower expense fund.

The final balance of the fund with 0.25 percent fees would be $ 44,334, while the balance for fund with 1.25 percent fees would be only $ 36,242.

Load funds

Some mutual funds charge loads, or sales fees. Load funds are only available through an investment adviser or broker who is compensated by sales commissions.

To avoid sales fees, call a mutual fund company directly to purchase a fund instead of going through a broker.

While picking no-load funds is one method of saving on fees, it may be worth paying for a load if you don’t have the time or proclivity to make your own investment choices. The idea is that capable guidance will yield better results to offset the fees.

But it’s difficult for even a skilled money manager to make up for those extra fees. If a broker charged a 5.75 percent load, you would be giving your broker $ 575 on a $ 10,000 investment to pick a fund for you, and after fees, you’d only be putting $ 9,425 to work for you.

Don’t pay too much: Fee guidelines

For no-load funds, investors should keep their annual expenses under the following thresholds: Active domestic equity: 1% Active international equity: 1.25% Active bond funds: 1% Index equity/ bond: 0.5%

About the Author

Bankrate was born in 1976 as “Bank Rate Monitor,” a print publisher for the banking industry. The “Bank Rate Monitor” newsletter we originally distributed contained much of the same rate research and information we’re known for and respected for today. Learn more about brokerage accounts at Bankrate.com.

Use and distribution of this article is subject to our Publisher Guidelines
whereby the original author’s information and copyright must be included.

Bankrate was born in 1976 as “Bank Rate Monitor,” a print publisher for the banking industry. The “Bank Rate Monitor” newsletter we originally distributed contained much of the same rate research and information we’re known for and respected for today. Learn more about brokerage accounts at Bankrate.com.












Use and distribution of this article is subject to our Publisher Guidelines
whereby the original author’s information and copyright must be included.

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