Mutual Fund Fees and Expenses

As payment for managing a mutual fund, investors are charged an advisory fee. An expense ratio measures how much of a fund’s assets are used for paying this fee and other operating costs, and the general rule is that the lower this is, the better for investors. However, high fees aren’t always completely avoidable. They can dent your portfolio returns, and it’s often difficult to figure out if these expenses are worth it.

When we talk about expense ratios, a large chunk of this is annual ongoing payments for managers, legal fees, accountants, etc. These advisory fees are typically between 0.25% and 1% per year of your investment of the fund. While 1% might not seem hefty, it’s definitely considered a high fee — the more a fund trades, the higher your returns, and the more of your assets will be eaten up by high operating costs.

For example, let’s look at a model portfolio from Forbes. This portfolio is made up of 80% stocks and 20% bonds, and returns just over 10% per year since 1978. This, combined with a fixed $100/month investment over 45 years, grows this portfolio to about $1,050,000 before fees. But with an annual fee of 1%, our model investor would have only received a 9% annual return, making the portfolio value $740,000 instead. So this 1% fee wasn’t so small after all - it took away about 30% of the portfolio’s value!

Therefore, it’s important to keep on top of your mutual funds, and to figure out what financial decisions will lead to your portfolio earning the most with optimum level of risk. Xillion’s Portfolio Analyzer product can help you with this.

The analyzer’s algorithm provides a clear and concise view of holdings from your brokerage accounts, and shows you how your portfolio is performing versus S&P 500. You’ll also receive recommendations and actionable steps customized towards getting returns that match your expectations.

Long story short, high fees for mutual funds can be scary, but we can help you understand which moves to make to optimize your portfolio and returns. Sign up for a free account with Xillion today and take this step towards financial freedom!