Investing Advice

Mutual Fund Fees

Mutual Funds donít deduct expenses directly from your account. Instead, they take a set percentage (disclosed in the prospectus) to pay for monthly expenses such as rent, salaries, etc., and profit. This fee is called the expense ratio. In 1980, the average expense ratio was only 1%, but is now 1.58% per year.

Since this money is paid out of the big account representing yours and the other investorsí money, the NAV of your shares is affected and reduced accordingly.

Expect to pay an expense ratio from a low .14% per year (Vanguardís S&P 500 fund) to over 2% per year at some funds.

Never pick a fund just because it has low fees. Lots of under-performing funds have low fees.

How Funds Distribute Capital Gains and Dividends

Once a year, late October through early December for most funds, the gains and dividends that the fund has earned are physically distributed to investors.

If you have elected not to automatically reinvest for additional shares, the fund will mail you a check.

The NAV price will fall on that day by the amount of the distribution, plus or minus any changes in the value of the fundís portfolio on that day.

The date that this taxable distribution is done is called the record date since the money goes to the owner of record on this day, and the following day is called the ex-dividend date (sometimes called the re-investment date). There is also another date, the payout date that checks are actually mailed. You can see why even many financial advisors get these terms confused.

When you buy mutual fund shares close to the record date, youíre going to owe taxes on profits that you didnít participate in. You should avoid this extra tax bite.

You can find this date in recent mailings from the fund, at their web site, or by calling their toll-free number.

Paying taxes even though you lost money

This may sound strange, but you may receive a taxable distribution even though your fund lost money. This would be from dividends, and also any short-term gains that exceed long term gains left over after subtracting long term losses (donít you hate all this confusing tax stuff?).

In plain English Ö who do I think Iím kidding, thereís no simple way to explain this, it just happens, okay? In the year 2000:

  • Apex Mid Cap lost 76% but passed on 22% in capital gains Ė investors owed taxes on $220 of every $1,000 they had in the fund before the big loss!

  • UAM Sterling Partners was up less than 1%, but had a whopping 95% taxable distribution Ė investors paid taxes on almost their entire investment, even though they didnít make any money!

  • Standish Small Cap Equity was down 19%, but had a 65% taxable distribution Ė investors lost a fifth of their money, but had to pay taxes on $650 of every $1,000 they had in the fund

This is crazy, but it really happens if your fund has a high turnover in its holdings or makes tax-insensitive choices.

Other Stock Market Basics Topics:

  1. Mutual Fund Advantages
  2. History of Mutual Funds
  3. NAV
  4. Dollar Cost Averaging
  5. General advice about choosing a fund
  6. Mutual Fund Ratings
  7. Evaluating Mutual Fund Investment Risk
  8. Mutual Fund Share Classes
  9. Mutual Fund Fees
  10. The Mutual Fund Prospectus
  11. How important is the manager's length of experience?
  12. Why is the prospectus hard to understand?
  13. Mutual Fund Annual Report
  14. Comparing your fund to the competition
  15. Comparing funds on an after-tax basis
  16. Average Return on Investment
  17. How Not to Pick a Mutual Fund
  18. Cashing in Your Fund
  19. When to Sell Your Fund
  20. Mutual Funds and Asset Allocation
  21. When to get started with a mutual fund
  22. Types of Mutual Funds
  23. Value Stock Funds
  24. Growth Stock Funds
  25. Small and Micro-cap Stocks
  26. Mid Cap
  27. Large Cap Companies
  28. Income Stock Funds
  29. Mutual Fund Index
  30. Enhanced Index Funds
  31. Sector Mutual Funds
  32. Stock Market Sectors
  33. Defensive Stocks
  34. International Funds
  35. Real Estate Mutual Funds
  36. Socially Responsible Funds
  37. Balanced Funds
  38. Tax-Efficient Funds
  39. Bond Convertible Funds
  40. Junk Bond Funds
  41. Mixtures of stock types
  42. Closed End Funds
  43. Exchange Traded Funds (ETFís)
  44. Stock Picking Strategy - Picking your own stocks?
  45. Fund names, and what they really invest in
  46. How to get started
  47. Where can I start investing with no money?

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