Hidden costs in Mutual Funds and Why you should know them?

When we are buying mutual funds we only think of the return on investment it can bring us, but not on the hidden ongoing costs involved after buying it, which is equally important to know. If you are thinking it is small, it can be a lot more than your assumption. In this article let’s look at the extra costs mutual funds bring on board.

Investors look at the expense ratio which says how much expense is involved to own and manage mutual funds. But mostly we will end up paying double the expense which is not advertised when buying it. There is lot more costs involved than just what is shown on the advertisement which an average investor can’t even grasp.

The costs can be seen broadly in two categories – Expense Ratio and Entry/Exit costs

Expense Ratio

It involves some of major costs incurred by Fund like –

  • Investment Managing & advisory fee
  • Transfer Agent costs & expenses
  • Custodian Fee
  • Other Operating expenses

Entry/Exit Costs

Here entry/Exit loads are the one-time expenses involved during a person enters or exits a mutual fund. These costs are charged as percentage on the amount of investment / Encashment.

Why should cost incurred in Mutual funds matter to investors anyway?

Whenever some costs are involved in mutual funds, it always will be reflected in the return on investment as deductions. It is also not mean that low cost Mutual funds are always better, but for an investor it is a matter of awareness that costs are being incurred on each entry or exit of somebody to or from a mutual fund and any other management costs involved are directly affecting his investment.

Having said that, small 1% cost may not look big, if the returns are bigger and greater, but even a small slight increase by 1% will have a big impact on the returns in the long term.

Also read – 5 Reasons to Invest in Mutual Funds compared to Direct Shares

How and where to know the costs?

Usually the expense ratios and entry/exit costs of mutual funds are periodically reported by major financial press and website related to mutual funds listings. Also this information can be directly fetched from the Mutual fund providers.

There are other costs which are quite not easy to catch and to get a proper projection. For example, when the fund re-shuffles its portfolio, buy and selling of shares will happen which involved payment of brokerages & commission fee to the stock brokers. This depends again on the style & investment philosophy of the Mutual fund. You can check this by seeing fund’s portfolio reshuffle cycles in the past and also carefully reading the prospectus at the time of buying.

What we can conclude?

Adding up multiple costs which may be smaller, could eat up the major part of the return on investment in the long run. So, it is advised to have a background research on the funds past performance, costs and the return on investment. Also it is very much need to know who is running the fund show and their investment philosophy as it plays a major role.