Mutual Fund Diversity May Need to Add Fees into the Equation

Investors holding mutual funds in taxable accounts for the sake of diversity are often - and surprisingly - left holding the bag on unanticipated fees and taxable events that can compromise returns.

While many assume that total fees are roughly 1%, the total may be much higher when lesser-known fees are included. The “average” statement of addition information disclosure costs maybe as high as 1.44%. Cash drag could account for an additional .83% and taxes for non-qualified monies at may be near 1%. Registered investment adviser fees can also average around 1%.

Although investors can’t necessarily remedy or reverse these expenses, they can become more knowledgeable before purchasing a fund. One way is to call the fund owner and ask for the fund’s “Statement of Additional Information,” which is broader than a ubiquitous prospectus. Another resource is a forbes.com article titled, “The Real Cost of Owning a Mutual Fund,” which provides further detail on various expenses, and warns of yet an additional potential expense when a fund is bought through an investment adviser.

Alternative investment and tax management strategies can alleviate some of the tax burden that can come with owning funds. There also remains a possibility of paying taxes on gains within a fund that experiences a losing year overall. A retirement adviser can provide investment alternatives that can produce tax-free income, but are not exclusive of fees, make no mistake. Similarly, an adviser or tax preparer – with sufficient notice that often begins in late summer or early fall – can identify assets offsetting gains and loses through end of the year tax harvesting.

Despite a full sea of financial mouse print, it behooves investors to seek information from sources besides funds’ representatives to gain a full grasp of mutual fund ownership expenses.