Could it be? In some ways it feels like mutual fund management fees are equally as complex, but can do more damage to your portfolio.
Why? Well, taxes are only charged on actual profits you make as an investor. While most mutual fund fees are charged to you regardless. A lot of these fees are just there, eating away at your capital; even if your investments actually lose money.
There’s so many fees. I’m just going to list them now. If I miss some, it’s either because a) I forgot some because there are SO MANY, b) they made up some new ones recently (totally possible), or c) I got depressed writing them down and decided to go nap in the fetal position.
Here are the various management fees for Mutual Funds:
- Management Expenses (often shown as a MER – Management Expense Ratio)
- Taking a % of your money, EVERY YEAR, just because they can
- Load Fees
- Front end load fees: like a nightclub taking a cover charge just to enter; but, this club sucks…and there are no hot chicks inside
- Back end load fees: like a nightclub shaking you down to pay an exit charge, just to let you out the door
- To be fair, not all funds charge these, but some still do – and those ones make me sad
- 12b-1 Fees
- If you are lucky enough to have money in a mutual fund in the United States, you may have the pleasure of paying a 12b-1 fee – this covers “marketing and distribution services”…congratulations, you’re paying for THEM to sell to YOU
- Transactions Fees & Taxes
- These are the same as if you managed your own money – except, fund managers don’t care how much you pay (you probably do, though) – they ultimately have no desire to control turnover of the funds’ assets, which can skyrocket these costs
- Redemption Fees
- Some funds charge you fees if you need your money back shortly after giving it to them, or if you simply have a sober second thought and realize how much they are charging you
- The time periods these crazy charges typically apply range from 30 days to a year
- Instrumentation Fees
- Just kidding, I made this one up – this is not a real fee of mutual funds, but I was on such a roll that it felt unnatural to stop listing them
If you think taking about 2% annually from your portfolio is not really that much, think of it this way: if the fund happens to gain a solid 8% annually, you are on average giving up 25% of your gains EVERY YEAR.
Say you invest $100,000 today…here’s the difference:
x Market gain of 8% annually for 30 years = $1,006,265
x Net Fund gain of 6% annually for 30 years = $574,349
What seems like a small amount, suddenly becomes a big difference.
Not scared/disturbed/petrified enough yet? Okay, maybe this next part in my 4-part “mutual funds tour of terror” series will nudge you along: