Thursday, May 31, 2012

The Cost of Owning a Mutual Fund

Although mutual funds can be a good way to diversify your investments across many securities, it can be an expensive way.   There can be many fees associated with owning a mutual fund, and it’s not always obvious how much you are being charged. The fund’s prospectus is the definitive source for identifying the fees. However, the prospectus can be 50 pages long and if you own 10 or more mutual funds you may not get around to determining the fees associated with each fund.

Many sellers of mutual funds tout them as “no load”. No load means that there is no sales charge paid to a broker. Investors may mistakenly believe that there won’t be any fees associated with owning the fund. But, loads are only part of the story as far as charges go. The key point to remember is that everyone wants to get paid, and your money is the source of that payment. The following fees are generally expressed as a percentage of your investment balance.  For example, if you have $10,000 invested in a mutual fund and there is a 1.5% Annual Expense fee associated with it, you’ll be charged $150 every year. $100,000 translates to $1500 in fees, etc. Here are some examples of fees charged by mutual funds that you may not be aware of.

1)      Redemption Fee – not considered a sales load even though it is deducted from redemption proceeds, just like a sales load.

2)      Exchange Fee – If you transfer from one fund to another you might be charged this fee.

3)      Account Fee – A type of maintenance fee that might be charged if your account drops below a certain dollar value.

4)      Purchase Fee - Some funds charge this fee when you buy their shares. It is not considered a load because it is paid to the fund instead of to the broker.  That’s right, they are charging you for buying their fund.

5)      Management Fee – This fee is paid to the fund’s investment advisor for managing the fund’s portfolio.

6)      Distribution (12b-1) Fees – Used to market the fund to other investors and pay brokers for selling shares of the fund.

7)      Other Expenses – If fees aren’t included in the Management Fees or Distribution Fees categories, they are included here. Examples are custodial, legal, accounting, transfer agent, and custodial expenses.
As you’ve seen, sales loads are just one of 8 potential fees associated with a mutual fund. Mutual funds are required to list these fees in the Fund Prospectus.  The Load plus the first three fees are considered Shareholder Fees and are listed under that heading in the prospectus. Fees 4 through 7 are considered Annual Operating Expenses, and appear under that heading in the prospectus. As the title suggests, they are recurring charges.

Mutual funds will list a Total Annual Operating Expenses item.  Although this helps in identifying a part of the expenses, it only includes the annual operating expenses (items 5, 6, and 7). As an alternative to digging through the fund prospectus, you might want to use the website. Morningstar not only provides expense information, but rates the funds and provides historical yield information in addition to other important information.

The actual fees charges by mutual funds vary considerably.  I’ve seen the Annual Operating Expenses range from 0.01% to over 2.5%. If you think that all of the funds charging 2.5% have higher yields than all of those charging 0.01%, you’re wrong.   Generally, fees are based on how actively the fund is managed. So a fund that is doing a lot of trading will generally be more expensive to own than a fund that just tracks an index like the S&P 500. Ironically, index funds tend to outperform the more actively managed funds and are generally less expensive to own.
Brycast provides investment advice, as well as financial planning and income tax services. If you would like help setting up a new portfolio, or evaluating a current portfolio please contact us at (512) 293-4170 or via email  to

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas

Sunday, January 1, 2012

High Interest Rates and Low Risk Investment

You don’t normally hear about high (relatively speaking) interest rates and low risk in the same sentence. Bank and Credit Union savings accounts are currently paying from 0.01% to 1%. However, there is a place that you can invest your money that is safer than a bank and whose interest rate is higher, the US Treasury.

In November of 2011, the Bureau of Public Debt announced that the earnings rate for Series I Savings Bonds is 3.06%, and the Series EE Bond rate is 0.60%.   The rates are adjusted every April and November, so the rates are good until April 2012.
I Bond rates are the combination of a fixed rate and semiannual inflation rate. The fixed rate applies for the life of the bond, and is currently 0%. But, the inflation rate is presently set to 3.06% and will remain there until the next adjustment date, April 2012.  EE bonds issued between November 2011 and April 2012 will earn 0.60% for the life of the bond.
Here are some quick facts about I & EE Bonds purchased electronically (not paper):

  • Sold at face value; you pay $50 for a $50 bond.
  • Purchased in amounts of $25 or more, to the penny.
  • $5,000 maximum purchase in one calendar year.
  • Issued electronically to your designated account.
If you redeem I/EE Bonds within the first 5 years, you'll forfeit the 3 most recent months' interest; after 5 years, you won't be penalized.
Interest earned from bonds is subject to federal income tax, but it’s deferred until redemption, final maturity, or other taxable disposition, whichever occurs first.  However, you may be able to exclude all of the interest from your gross income if you use the bond to pay for qualified higher education expenses. You can visit the Treasury Direct website to get more information about saving bonds. 

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
Enrolled Agent; Registered Investment Advisor