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Understanding What Mutual Funds Cost

So, you found the perfect mutual fund for your investment goals.

Before you invest, do you know how much that mutual fund costs?

Last week, I wrote a beginner’s guide to mutual funds. As I said, mutual funds are ideal investments for new investors and anybody who wants to take advantage of the stock market’s upside but has no interest in trading stocks or worrying about the markets daily ups and downs. Mutual funds offer set it and forget it investing. That’s a good thing.

When you invest in a mutual fund, you want:

  • the right mutual fund for your investing goals (we’ll cover this soon)
  • a low-cost mutual fund


When you buy stock in a single company, you must pay a stock broker a commission to execute the transaction. Then, you own the stock, and there are no more expenses to hold that stock until you sell it, at which time you pay another commission.

Mutual funds, however, have other fees.

Remember that mutual funds are collections of stocks, bonds, and other securities. Often times, they are actively managed, meaning a team of people are doing research and making trades daily to ensure the fund performs according to its investment objectives. Even in a fund that’s not actively managed, trades are executed to keep the fund’s portfolio balanced as money flows in and out of the fund.

These trades—and the management and research in an actively managed fund—cost money. And these costs are passed along to the mutual fund investor. That’s OK, but a key to smart mutual fund investing is to identify the funds with the lowest cost for your investing objective.


What you need to know about any mutual fund are its expense ratio and sales load.

Expense Ratios

A mutual fund’s expense ratio is the percentage of a fund’s assets that go purely to running the fund. It encompasses many things, including:

  • investment advisory fee or management fee
  • administrative costs
  • 12b-1 distribution fee (advertising)

Basically, all the funds costs are rolled up into the expense ratio, which is expressed as a percentage like 0.20% (on the low end) or 1.60% (on the higher end).

Why do these fees matter?

Mutual fund fees are sneaky, because you never feel them come directly out of your wallet. When you invest $2,000 in a mutual fund, for example, you pay $2,000, not $2,000 plus $20 for expenses. But over time, the mutual fund company takes its expenses out of the fund’s total assets, and any investment returns you earned are reduced by the amount of the fund’s expenses.

For example, if you invested $10,000 in a mutual fund that gets an 8% average annual return for 30 years, here’s how mutual fund expenses can impact your return:

Investing Fees on Returns

In a fund with a 1% expense ratio, you’ll have $76,122 in 30 years. Invest that same money in a fund with the same return but a 2% ratio, and you’ll only have $57,435 after 30 years. That’s a difference of $18,687 on just a $10,000 investment. The more you invest, the more fees eat away at returns. (And if you found a mutual fund with just a 0.20% expense ratio, you’d have $95,184 after 30 years. Take that to the bank!)

Sales Loads

Mutual fund expenses are a necessary evil—mutual funds cost money to administer. If you want the convenience of investing in these funds, you have to pay the expenses. But there’s another far more sinister fee that some funds charge known as a load.

A load is simply a fancy name for a sales charge or commission.

Fortunately, mutual funds are grouped into load funds and no-load funds, so it’s often easy to search only funds that don’t have this added cost. Note, however, that if a broker or financial advisor is recommending funds for you to invest in, these may be load funds. That person will likely get the load as a commission for helping you pick a fund. (That’s why I recommend using a fee-only financial advisor to avoid this.)

You can read more from the SEC here or from The Motley Fool about fund costs here and mutual fund loads here.


Mutual fund costs must be clearly disclosed in the mutual fund’s prospectus, which you can download directly from the fund company’s Website or from a mutual fund research Website like Morningstar.

Morningstar and other sites make it easy to research fund sand identify their fees. As an example, the following screenshot of a Morningstar free fund information page clearly shows both the fund’s load and expense ratio, which I’ve highlighted.

You can find a mutual fund's fees in its prospectus or on data Websites like Morningstar.


What a mutual fund costs is one of the most important factors in deciding on a fund to buy.

  • A mutual fund’s expense ratio eats away at your returns. Avoid funds with expense ratios of more than 1.0%.
  • If you’re comfortable learning about and choosing a mutual fund yourself, you should never buy a fund with a load.
  • You can find a mutual fund’s costs listed in its prospectus or on Websites like Morningstar.

Stay tuned for more articles in this series including how to pick a mutual fund and some fund recommendations for new investors.


Published or updated on December 19, 2011

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. Ben S. says:

    Thanks for this article, David. Previously, I blindly trusted my in-house advisor to choose the ‘right’ funds for me, after talking to him about my goals and objectives. Not only did I end up with a high expense ratio with his recommended lifecycle fund, they tacked on a 5.75% load as well. I’m moving over to Vanguard today…

  2. Amber says:

    Thanks for explaining the expense ratio. I just opened my first IRA last year and while I knew that higher fee was bad, I didn’t understand how it was taken out of the total.

  3. jack foley says:

    Personally, I believe if you are investing, then you should educate yourself first and forget hiring an advisor..

    It all goes back to responsibility. Do you want to be responsible for your future or your financial ad-visor?

    • Dave says:

      I do fully agree. I didn’t go in blindly (rejecting whatever bad product my parents’ insurance guy was trying to sell me), nor did I pay the advisor(my independent insurance agent) who set me up with a Roth and these funds (I guess his pay is apart of the 1+% ratio).

      Now the hard part might be to move my $ out of the limited fund company it is in, into something more expansive I can control myself.

  4. Dave says:

    Thank you so much for this series.

    I’m self-employed and have been plugging monthly into mutual funds into a Roth for maybe 4-5 years (I’m under 30). I’m invested in 4 different funds, and my wife also recently rolled a retirement fund from a past job into the same funds.

    We don’t have a lot invested, but I checked those funds and sure enough all the expense ratios are well above 1%. I now realize I’m limited in what I can choose because my financial advisor works with one of those fund companies.

    Not sure what to do next, if we should move the small amount into index funds or what.

  5. jack foley says:

    Great advice Dave,

    diversification is key…

    cash, stocks, gold, etc. I’m not at all hopeful of bonds in the long run..

  6. Colin says:

    Correct me if I’m wrong, but the way the expense ratio works is that it’s x percent of every $100 invested.

    Thus, an expense ratio of .20 means that if you have $1,000, the expenses for the year is $2 (0.002 x 1,000).

    Also, it should be mentioned that expenses are paid regardless of positive AND negative returns. Just because you lost money on the year doesn’t mean you’re not paying expenses because your fund failed to perform.

    Last, a place I like for low-cost funds are at Vanguard. Some of them have expense ratios as low as .06% but most are between .20 – .50%. The ones with the really low expense ratio are nice but have higher fund minimums ($10,000 & up)…these super low cost funds are their “Admiral” funds

  7. Mark says:

    So when the returns are advertised, does that already include the expense ratio? For example, if a fund with a 1% expense ratio says its return for the year is 10%, does that mean the investors received a 10% gain or a 9% gain?

    • David Weliver says:

      Hi, Mark, Advertised returns of no-load typically are adjusted for expenses, yes.

      However, loads paid on mutual funds often depend on the investment amount so these are not included in advertised returns.

  8. Gecko22 says:

    So I just logged into my 403b to see what the expenses are – and on one of them there is both a gross expense ratio and a net. What that about?

    thanks for this though, it is a great series so far…

    • David Weliver says:

      Good question. A recent regulation change now requires funds to report both the gross and net expense ratio. Previously funds only reported the net expense ratio. The net expense ratio reflects the amount the fund expenses affect your return, so it’s the one you need to worry about.

      The gross expense ratio represents the fund’s total expenses before considering any fee waivers or reimbursements. Put simply, this is money the fund company puts back into the fund to keep the net expense ratio down. For example, a new mutual fund has high advertising costs to attract new money. This creates a high expense ratio which could dissuade investors. So the fund company will reimburse advertising costs to the fund to keep the net expense ratio down.

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