mutual fund

Are Mutual Fund Reported numbers net of Fees?

“Operating expenses” is what the answer to this really depends on.

In order to clear this ambiguity, let us assume a cinematic metaphor. The cost related to a mutual fund is similar to the cost associated with visiting a movie theatre. For instance, assuming the price of a ticket, $9 and, the snacks add an extra $4. So, for your entertainment, the total cost sums up to $13.

A similar situation is applicable when we talk of the total cost of mutual funds. You must take the total returns from the fund into consideration. For calculating it, the total operating expenses are first deducted. These are inclusive of the auditing, accounting, legal, taxes, custodial services, record keeping and investment management. It is also called as the expense ratio. In addition, there is the marketing or the distribution fee. Thus, the total return is a net figure which is calculated by subtracting both these expenses from the net return.

In addition to the above there are the transactional costs. These are inclusive of the brokerage fees for portfolio securities buying and selling. Also, there are the spread differences between the ask and bid prices. These do qualify as the operational expenses but are not included in the expense ratio. If a fund has a high portfolio turnover, these expenses can be significant for the fund. Lastly, if applicable, the load or sales charge is also not included in the expense ratio.

When we consider the above statements, we notice that the expense ratio for a mutual fund is similar to the price of a movie ticket. The sales charge and the transactional costs are equivalent to the spending of a moviegoer at the counter for refreshment. Obviously, similar to the movie ticket, the expense ratio does not capture the total cost for that respective mutual fund investment.

When we consider the expenses and the costs, the investment quality of a mutual fund increases when the 12b-1 fees and the sales charges are absent. Also, the same phenomenon is observed in case when the low portfolio turnover ratio and expense is present. It is usually a record that the low cost funds tend to outperform funds with high costs.

As a reader, you must take note that due to the redemption fees associated with early withdrawals from a fund being in control of the investor and, not the company operating and managing the fund; this fee is not included in the discussion.

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