HIGH FEE MUTUAL FUNDS can COST YOU MORE THAN YOU REALIZE!!!!!

in #partiko5 years ago (edited)

Mutual funds can be a great way to achieve diversification in your investment portfolio but investors often overlook one of the most important aspects of a fund which are the FEES associated with the fund.

Many investors analyze the historical performance, strategy, risk, holdings, etc when evaluating whether or not to invest in a fund but often do not pay as much attention to the fees that a fund may charge.

Many mutual funds have similar strategies, holdings and risk but usually vary quite a bit in the FEE department!

For example actively managed mutual funds that try to outperform the broad market by utilizing the skill of the manager in order to pick stocks that are expected to perform better often come with a much higher price tag related to annual fees than a passively managed index fund that tracks the performance of the broad market.

For example many actively managed funds have annual fees in excess of 1% of your assets invested and most passive index funds such as Vanguard funds have annual fees less than .5%!

Now the question you need to ask yourself is whether or not the actively managed funds are worth the additional annual cost?

Many studies have been conducted that show on average most actively managed funds do not outperform compatible passive index funds over the long run! Studies suggest that there are very few actively managed funds that can consistently beat the compatible passive index funds in the long run.

What does this mean?

For most people who do not pick the stellar actively managed fund that outperforms consistently they would be much better off investing in passive index funds!

How can picking a bad actively managed fund impact your portfolio?

Let’s say Active Fund 1 delivers a 7% return annually and Passive Fund 1 delivers a 6.5% return annually. Now many people would say choosing the active fund is a no brainer since the return is higher but that could be a terrible mistake that could cost you!

Let’s add sone additional facts. Let’s say the annual fee for the active fund is 1.5% of assets invested and the passive funds annual fee is .5%.

Taking fees into account the active funds annual return is decreased from 7% to 5.5% after fees! The passive fund is decreased to 6% after fees!

Taking the fees and the return into consideration the passive fund should be used as the net annual return after fees is .5% higher!

Now many of you may say big deal what is .5% and why should I care?

Let’s look at what the growth of a $10,000 investment in each fund would be after 30 years.

A $10,000 investment in the active fund for 30 years would have a future value of approximately $50,000.

A $10,000 investment in the passive fund for 30 years would have a future value of approximately $58,000 which is $8,000 more than the active fund!

By choosing the active fund with a higher return before fees you would lose out on $8,000! This can be even more profound with larger amounts of money!

The main takeaway is that you need to make sure that if you invest in a fund with higher fees that the fund is actually delivering superior results otherwise you may take a huge hit to your future portfolio value!

Disclaimer

This article should be considered as informational only. This is not tax, legal, financial or investment advice. Please consult your advisor and due your research.

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