Chuck Jaffe Get email alerts

3 questions for thrifty fund investors

Published: Apr 29, 2012 12:01 p.m. ET


Commentary: Pay less for your investments, and get more



BOSTON (MarketWatch) — Two new studies show that mutual fund investors paid less, on average, for their funds last year, continuing a long, slow trend.

That news, released in separate studies from the Investment Company Institute and investment researcher Morningstar Inc., should raise three questions for fund investors:

1. What do my funds charge and are they part of the low-cost trend?”

2. Am I paying too much?

3. Could I pay less without damaging my portfolio, asset allocation or emotional security about my strategy and plans?

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Before answering those questions, you must first know something about the results of those studies.

According to the ICI’s “Trends in the Fees and Expenses of Mutual Funds” study for 2011, the average expense ratio paid by equity fund investors was 0.79%, down from 0.83% in 2010. Over the last two decades, average expense ratios paid by equity-fund shareholders have fallen by 20%. In bond funds, according to the ICI, the average cost was 0.62%, down from 0.64% a year earlier.

Morningstar’s annual survey of fund expenses conducted by Russel Kinnel, the firm’s director of mutual fund research, produced similar results, except that it lumped fund types together, pegging the average expense ratio paid by shareholders at 0.75% in 2011, down from 0.77% a year earlier.

Kinnel noted that the average investor is paying 0.19% less in expenses than they did less than a decade ago.

Cheap and lowdown

A lot of things contribute to how expense ratios are calculated, not least of which is asset flows. While you might assume that lower expense ratios mean fund firms are cutting costs, that’s not really the truth.

The typical investor is paying less because, increasingly, they have sought out cheaper funds.

Said Kinnel: “It’s the choices made by investors that have had the greatest impact. Investors have generally invested new money in lower-cost funds within a category. In addition, the growing popularity of bond funds has meant that money is flowing toward the lowest-fee asset class, thus lowering the overall rate. “

That means the question of “What do my funds charge and are they part of the trend?” is as much about self-awareness as fund expenses.

There aren’t many reasons to pay up for a fund. Unless it is in a space like alternative investments or emerging markets where research costs are higher and the entire category charges more than normal, investors should remember that extra expenses come directly out of their pocket.

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