Your Mutual Fund's Hidden Costs

When looking for a mutual fund, most Fools make sure to check out its track record and annual expense ratio. But you might not take the time to relate those two numbers to one another, to figure out how much of your returns you'll be forking over in fees.

Suppose you're looking at two higher-risk mutual funds that both aim for robust capital appreciation:


Expense Ratio

5-Year Average Annual Return

Top Holdings Include:

Putnam Capital Appreciation A (PCAPX)



Oracle (Nasdaq: ORCL  ) , Johnson Controls (NYSE: JCI  ) , McGraw-Hill (NYSE: MHP  )

Vanguard Explorer (VEXPX)



GameStop (NYSE: GME  ) , Waters (NYSE: WAT  ) , Jacobs Engineering (NYSE: JEC  )

Consider that your average returns are net of expenses, so the funds' gross returns are actually higher. But if you compare those gross returns to expenses, you can see how much of your hard-earned money gets eaten away by fees .

For instance, with a gross return for the Putnam fund around 6.64% -- 5.3%, plus the 1.34% its managers take in fees -- its  expense ratio represents more than 20% of the fund's total returns. Worse yet, the fund's average 10-year annual return is just 1.44% once that 1.34% expense ratio is subtracted, meaning that nearly half of its long-term performance gets paid to fund managers.

Meanwhile, the Vanguard fund has a much lower percentage of returns going to fees -- about 4%. Over 10 years, the numbers are similar -- about 5% of the fund's total return went to fund managers.

Do the math for the funds you own. Your calculations may provide an extra incentive to seek fund families known for their low fees, such as Vanguard, American Funds, and Fidelity.

Want pointers to a bunch of outstanding mutual funds? Try our Motley Fool Champion Funds newsletter -- a free trial includes full access to all past issues, so you can read about each recommendation in detail.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. McGraw-Hill is a Motley Fool Inside Value recommendation, and GameStop is a Motley Fool Stock Advisor pick. Try any of our investing newsletters today, free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 675283, ~/Articles/ArticleHandler.aspx, 10/28/2016 4:23:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,161.19 -8.49 -0.05%
S&P 500 2,126.41 -6.63 -0.31%
NASD 5,190.10 -25.87 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 4:01 PM
GME $23.90 Down -0.09 -0.38%
GameStop CAPS Rating: **
JCI $43.76 Down -0.25 -0.57%
Johnson Controls CAPS Rating: *****
JEC $51.10 Up +0.42 +0.83%
Jacobs Engineering… CAPS Rating: *****
ORCL $38.17 Down -0.05 -0.13%
Oracle CAPS Rating: ****
SPGI $122.28 Down -0.58 -0.47%
S and P Global CAPS Rating: ****
WAT $139.81 Down -0.99 -0.70%
Waters CAPS Rating: ***