Low Expense Ratio

One of the big advertising kicks today from mutual funds is to tell how low their expense ratio is and that you will make a great deal more money if you buy and hold with them. Partly true, but that is not the whole story.

What is the expense ratio? It is all their overhead including but not limited to all the managers and other employees salaries, rent, computers, utilities, travel (the fund manager says he has to visit a company in Florida in the winter to see how it is doing), advisory services, telephone, etc., etc, etc. Oops, and don't forget the manager's bonus whether he makes money for you or not. If the fund has one billion (yes, that's a B) that means they can spend $10,000,000 on expenses and no one will complain because it is a tiny 1%.

At some point expenses just about stop going up as you don't need very many more people to manage the paper work for a billion than you do for 250 million. The fund manager's duties remain the same just the size of the orders he places changes. Actually as a fund grows in size its expenses should automatically come down as a percent of assets, but you will find that is not the case for many funds. They keep sticking it to their investors who don't have any idea how egregious this is.

The larger the fund family the lower should be their expenses per fund as they can outsource from the fund to a central billing and customer service desk.

Vanguard Funds has more than 100 individual funds in its family and they brag on how low is their expense ratio. It should be as they have more than 720 Billion spread out over those funds. They keep their expenses low and at only 1/2% they can charge about 360 million to offset their overhead.

Many funds run very high expenses. This is especially true for new and smaller funds, but as they take in more money they can spread their expenses and lower their ratios. One of the recent criticisms of funds is they have been making extra charges labeled 12B-1 that are supposed to be expressly for promotion to bring in new customers. Unfortunately, some (not all) of the fund managers have been pocketing this. If this does bring in new money then the expense ratio should fall and again in many cases it has not.

Investors expect fund managers to be honest. When large sums of money are at stake it seems to bring out the worst. That real nice fund manager turns into a hungry wolf and the investor becomes one of the 3 little pigs that did not escape.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

In The News:

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New to mutual fund investing? Here are 5 broad options to choose from  Moneycontrol.comWhen the market is more volatile it is advised to invest through mutual funds as they are less risky and gives good returns when invested for a longer term.
Top 10 large, mid and smallcap stocks which fund managers bought & sold in September  Moneycontrol.comFears of a liquidity crunch following the IL&FS crisis hit the mutual fund industry in September. Cash plans, or liquid funds, were the worst hit.
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Best value-oriented equity mutual funds to invest in 2018  Economic TimesEven as the stock market stumbles along nervously, many investors are looking for tools to navigate the volatile times in the market. And suddenly everybody is ...
These 10 stocks make up over one-third of entire mutual fund portfolio in India; check full list  The Financial ExpressEven as Sensex and Nifty continue their strong rally driven by a cheer in blue chip stocks, just 10 top names make up a whopping 34% of the entire mutual fund ...
How much do mutual fund managers invest in their own schemes?  Moneycontrol.comEver since SEBI mandated mutual fund houses to disclose how much fund managers, directors of the asset management company and other key employees ...
Five basic formats of equity mutual funds you must know before investing  Moneycontrol.comIs it the right time for you to invest in mutual funds? Choosing the right mutual fund in one's portfolio is not an easy task. Here are the five basic formats of equity ...
Benefits of asset allocation in mutual funds  Economic TimesWith macros looking weak and stock market indices at a new high, financial planners believe it is important for investors to follow the principle of asset allocation.
Mutual funds' AUM plunges by Rs 2.11 lakh crore in a month  Economic TimesThe drop in the asset base is mainly due to an outflow of Rs 2.3 lakh crore from MF schemes.
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Want to invest in ‘value’ stocks like Buffett? Look at these funds  Economic TimesValue investing is a strategy to spot stocks trading below their intrinsic values.
Mutual funds sell financial stocks the most as markets soared in January  MintMutual funds locked in gains in financial stocks the most among the top stocks in January, taking advantage of the run-up in the pack and record high levels in ...
Top stocks bought and sold by mutual funds in April 2018  IndiainfolineMutual funds received record-breaking inflows of Rs6,690cr into the mutual fund industry via SIP in April 2018. During FY18, the mutual funds received Rs67 ...
List of best mutual fund portfolios as per your risk appetite  Moneycontrol.comYou can build a portfolio of mutual fund schemes based on your risk profile.
6 mistakes that small investors make when stock market is doing well, interest rates are rising  Economic TimesThe biggest mistakes happen when markets are doing well. In many cases, the SIP returns are in the red.
Do not make these 7 mistakes while investing in mutual funds  Moneycontrol.comNever forget that you are investing because you have to achieve your financial goals. Investing without a goal is akin to travelling without a destination.

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