Investing in mutual funds is the favorite strategy of a lot of people looking to set up a retirement fund. It helps that it’s widely available to almost everyone looking to set aside money that they can use when they retire. However, most people are not aware of the hidden costs. If you’re investing in mutual funds, it makes sense that you’re familiar with all the costs involved.
You might be under the impression that all the money that you’re putting in your mutual fund is going straight to your retirement fund. This is not the case. There are expenses when it comes to managing a mutual fund and this is why investors have to pay fees.
There are Hidden Fees
While you’re familiar with the more known fees like account fees and management fees, there are also lesser-known fees that you probably don’t know about. While most of them don’t cost a lot, and this explains why investors don’t notice them, these fees can add up.
Knowing about these hidden fees is important so you can make decisions based on this information. You can make the necessary adjustments like maybe choose another fund, or you can build your retirement fund with the understanding that you’re being billed for such amount so you can adjust your investment.
Revealing the Hidden Trading Costs
Trading costs are the hidden costs that can take a huge bite out of your investment. These are the fees that you pay to cover for the expenses incurred in the buying and selling of the assets like the stocks and bonds.
Why are these fees hidden? It’s because companies are not required by law to disclose them. In addition, it’s really hard to know for sure what the exact amount is. The best you can hope for is an estimate, but estimating these fees requires a complicated calculation.
Estimating these Fees
Generally speaking, the more active you are with your buying and selling, the more expenses you incur as an investor. This means that you’ll have to pay more fees. A study has shown that the average for the trading cost is 1.44%. This may not sound much, but note that the mutual fund expense ratio (the operational costs of the mutual fund) is estimated at 1.19%. This means two things – that the hidden fees are estimated to be higher than the operational costs and that you’re paying 2.63% as costs of your mutual fund!
Let’s say that you have $20,000 in your mutual fund. You’re paying $288 on hidden fees alone in addition to the $238 that you know you’re paying for a total of $526 a year!
What should you do?
This is not to say that you should stop investing in mutual funds because the benefits still greatly outweigh the disadvantages. You can avoid expensive trading costs by focusing on index mutual funds and exchange-traded funds. These are funds that utilize low-expense strategies when trading, so there are fewer expenses passed on to the investors. In addition to having lower expense ratios, they also have lower trading costs because the managers of these funds do fewer buying and selling.
Diversify your investments and check out index mutual funds and exchange-traded funds.