Online Investing Hacks

Why Don’t My Funds Perform as Well as Others?

Learn how mutual fund expenses cut into the money you make on your fund investments.

It can be downright disheartening. You check annual returns for some of your mutual funds, and notice that they never seem to perform as well as other funds or their corresponding stock market indexes. Even worse, a fund might trail most of the other funds in the same category. Some funds are simply dogs, but, in a lot of cases, below-par returns result from excessive fund expenses. You can improve your results by understanding how mutual fund expenses drag down returns, and trading in your high-cost funds for similar funds with lower expenses and correspondingly better results—see [Hack #66] and [Hack #67] .

It costs money to run a mutual fund, so don’t be surprised that you, as a fund shareholder, pay a portion of those costs every year. Fund expenses directly impact your investment returns because they’re deducted from your investment in a fund. They literally take money right out of your pocket. To make matters worse, you pay even more if you use a financial advisor or broker to purchase fund shares. Expenses are easy to forget because funds show them as a percentage of your investment. You rarely see the actual dollar costs you pay every year for the privilege of investing in a mutual fund.

The commissions that funds pay to brokers for trades [Hack #61] take a further bite out of results—one to two percent a year. Unfortunately, fund companies ...