Tuesday, July 29, 2008

The Real Costs of Mutual Funds

I am not going to slam all mutual funds in this post. I believe that mutual funds have a place for some investors. What I am going to slam is the mutual funds that do two things: (1) Charge high management expense ratios (MERs) above 0.50; and (2) Charge either a front-end load or a back end load.

For those that do not know, a load is a sales charge or commission paid by the investor either when buying the fund (front-end load) or selling the fund (back-end load). It is bad enough when a fund charges a high MER, but if you choose a load fund the costs get way out of hand. Let's have a look and the impact both a high MER as well as a load has on your ability to earn and keep more of your hard earned money.

First, let's look at a low MER no-load fund offered by the folks at Vanguard. The fund I chose was the Vanguard Dividend Growth Fund, because I love dividend stocks! Here is a summary of how a $10,000 investment growing at 8% over 20 years will perform:

Remember, the Vanguard fund has a low MER at 0.32% and no sales charged. After 20 years at a constant growth rate of 8% the investor pays $1,462.90 in fess and is left with $43,720.29. Now lets look at a high MER loaded fund. This fund is the Eaton Vance Dividend Builder Fund Class A. Here is a summary of this fund:

I find this to be a very drastic difference. With the same initial investment and the same constant rate of return, the difference in what the investor is left with is very dramatic. With Eaton's 1.04% MER AND the sales charges the investor is left with only $35,680.54. That is an difference of over $8000. A retiree is going to rely on all their money to supply them with a fulfilling retirement so keeping more of your gains is crucial.

The key to any kind of investing, be it active or passive, is keeping fees down. If you are truly passive and turn your money over to an investment advisor, then please remember the above example and be sure your advisor chooses a fund with a low MER and pays absolutely no sales charge.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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