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:

Fund

Expense Ratio

5-Year Average Annual Return

Top Holdings Include:

Putnam Capital Appreciation A (PCAPX)

1.34%

5.3%

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

Vanguard Explorer (VEXPX)

0.41%

9.9%

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.


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