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Practical Money Matters - Understanding Your Mutual Expenses

POSTED July 26, 2011 10:13 p.m.

U.S. investors have close to $12 trillion socked away in mutual funds, according to the Investment Company Institute. About 44 percent of U.S. households — or roughly 90 million investors — have a mutual fund investment. Despite a surge of withdrawals during the height of past market uncertainties, mutual funds clearly still remain a popular investment option for many people.
If you are selecting a fund, it’s important to understand the costs of investing, which may not always be immediately apparent. The California Society of CPAs (www.calcpa.org) provides these tips for making sense of the price of your mutual fund investments.

Understanding
Mutual Funds
Mutual funds are essentially a pooled investment made up of the contributions of many individual investors. You buy shares in a fund and receive a return (or experience losses) based on how well the overall investment pool does in the market. The types of investment include stocks, bonds, money market, commodities or various hybrids. Funds may have a range of different purposes, including growth or income, and different levels of risk.

Considering Loads
vs. No Loads
In some cases, it may be necessary to pay a commission — or a load — to buy or sell mutual fund shares. No-load funds, on the other hand, do not charge a commission. However, these funds may charge other fees or their expenses may be higher than those of a load fund with similar objectives. That’s why it’s always important to get the big picture when picking any investment and avoid making a decision based on any one factor.

What’s the Expense Ratio?
This is an important consideration in evaluating a fund. In simple terms, the expense ratio is the cost of running the fund divided by the amount of assets in the fund. Expenses can include the fund manager’s fee and other overhead and administrative costs, such as taxes and legal and other fees.
Not surprisingly, you are most likely going to want to look for a small ratio. That’s because the expenses are deducted from the total assets before they are invested. The smaller the asset amount, the lower the return the fund will get on that amount. That seemingly small loss can add up significantly over time.
An average expense ratio for a mutual fund might be around 1.5 percent. For an index fund, which invests in a portfolio that mirrors a specific stock index, such as the S&P 500, the expense ratio may be significantly less — in some cases as low as about .20 percent.

Check Out Available
Resources
To get a better sense of the costs of certain funds, you can turn to a fund analyzer on the site of the Financial Industry Regulatory Authority (FINRA), which analyzes over 18,000 funds, including the related fees and how they will affect your investment. In addition, the Securities and Exchange Commission site also provides information on how to calculate and consider mutual fund fees and expenses.

Find Out About
Mutual Funds
Want to learn more about the ins and outs of mutual fund investment? The CPA profession’s 360 Degrees of Financial Literacy site offers a wealth of articles and questions and answers on the subject. The site also provides useful information about a wide range of other financial issues.

Turn To Your
Local CPA
Making any investment involves complicated decisions. If you have concerns about your options, remember that your local CPA can help. Turn to him or her for information and insights on all your financial questions.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.

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