Why do we make such a fuss about mutual fund fees here at the Fool? Because they really make a big difference. Imagine that you've invested $10,000 in a fund that charges a 2% management fee. In 30 years, if that investment grew at 12% per year on average, it would become $174,000. Not bad. But suppose you'd plunked that money into a fund with just a 1% fee. In 30 years at 12%, it would grow to $229,000. That's a $55,000 difference!
"It's simple math: The more you pay to invest, the less you'll get back in return. So-called 'frictional costs' -- brokerage commissions, fees, loads, 12b-1 fees, and taxes -- leave less money to compound through the years. Which is why The Motley Fool has long recommend discount brokers and no-load, low-cost mutual funds. The problem with the latter, however, is you don't always know how much you're really paying a fund to manage your money."
He goes on to say that, "Funds must pay commissions to buy or sell securities, just like you and me (though they receive volume discounts). These commissions, however, are not part of the expense ratio. Nor are they usually revealed in a fund's prospectus. To find out how much a fund pays its broker -- money that comes straight out of the fund shareholders' pockets -- an investor must dig through the fund's Statement of Additional Information, which is filed with the SEC, or the semi-annual filing of form NSAR. Raise your hand if you've heard of these documents."
You can take much of the headache out of investing and meet the market average by investing in index funds, which everyone from Fool co-founders David and Tom Gardner to John Bogle to Warren Buffett recommend. Learn much more about mutual funds in our Mutual Fund area and our Index Fund area.
Of course, a few funds do tend to beat the averages over time. We recently launched a new newsletter to highlight promising mutual funds for you -- check out our Motley Fool Champion Funds.