Expenses Associated With Mutual Funds

In my series of articles on mutual funds, I wrote three articles outlining the basics. I let you know that a mutual fund is set up like a corporation or trust and pools money from a number of different investors and invests it into different types of securities. I also told you that mutual funds have a fund manager that buys and sells the fund's investments.

Like other companies, mutual funds come with their expenses. One expense is the management fee for the fund. Remember that fund manager that makes all of the important decisions regarding which investments to make for a mutual fund? This covers her paycheck. Administrative fees will typically be included in this fee as well. In addition to management fees are non-management expenses which most funds have to pay.

These include transfer agent expenses (this is the person you have to pay when you want to buy or sell shares of a fund), custodian expense (this is when the bank charges the fund for keeping its money in it), registration expense (when a fund files registration statements with the SEC it gets charged.) Other expenses include legal/audit expense, printing and postage expense (from when shareholder reports are printed and delivered), the board of directors/trustees expense (they enjoy getting paid also) and fund accounting expense.

Another expense that won't be listed on the fund's income statement and can't be controlled by the investor is brokerage commissions. These are typically charged when securities are bought and again when they are sold and they will be reported usually four months after the fund's fiscal year end. To prevent corruption, the advisers of the mutual fund companies need to make sure that the commissions charged to the fund will not be excessive and they must also try to find the best possible price when they buy or sell securities.

If you are looking to cut back on the cost of management expenses, one interesting concept worth considering is funds of funds. These are mutual funds that invest in other mutual funds. Usually a fund of funds will charge a much lower management fee than that of a fund directly investing in securities because it is less demanding to simply invest in mutual funds rather than individual securities. Most funds of funds invest in mutual funds that are managed by the same adviser, but some do not, and some may invest in both. If you are looking to trim down your management costs, try to look for funds of funds that invest in funds managed by the same adviser because the research that goes with finding different funds with different managers entails more money. To determine if investing in a mutual fund is worth your while, check out my next article "Is Investing in a Mutual Fund Worth Your While? Part One