Mutual fund fees and expenses, what is a reasonable level?

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High fees can eat you up, so choose wisely

So many investors overlook a very important part of choosing a mutual fund, their expenses. In this post I will look solely at actual expense ratios, and not load levels. In the past I wrote about loaded funds vs. no load funds. When looking at mutual fund expenses we should first breakdown what the categories are and exactly what they mean.

Management Fees- These are the fees paid to the fund's investment advisor for managing the investment portfolio.

12b-1 fees: These are the distribution fees. These would include marketing of the fund, printing and mailing out prospectuses, and sending out sales literature.

Other Expenses: These are generally custodial expenses, some administrative expenses, and legal expenses.

Total Annual Fund Operating Expenses: The total of the fees above expressed as a percentage of the fund's average net assets.

Now that you know what the breakdowns for the mutual fund fees are, what are the average mutual fund fees? The average common stock mutual fund has an expense ratio of about 1.5%. That number has been rising over the last few years, and will likely continue to head toward 2%.

While the average may 1.5%, there a lot of variables that determine which kind of finds are more expensive than others. Index Funds are always the cheapest because they simply track the overall index and involve no management. Very active mutual funds are exactly the opposite. Funds that are constantly buying and selling stocks typically have a very high expense ratio to cover their much higher costs from increased turnover.

Let's break it down further by category:

International Funds-always have higher fees because they typically have very high expenses as far as employing people in multiple countries. Morningstar says the average International Fund expense ratio is about 1.68%.

Small Cap Funds- typically have rather high expenses because trading small cap stocks is more expensive and the research of small cap companies is difficult to come by. Morningstar says the average here is 1.61%.

Large Cap Funds- generally have lower expense ratios because the research is more abundant and outside research is often unnecessary. Morningstar says the average expense ratio is 1.45%.

Finally, if you want to compare mutual fund expenses the FINRA has an excellent tool available to you. All you have to enter into this calculator is the amount invested, rate of return, and number of years you expect to hold it. The calculator does the rest of the work for you and shows you what your final fund value would be for the mutual funds you have compared. I used this very tool to compare the Janus Twenty Fund (JAVLX) to the Oakmark Select Fund (OAKLX). I setup the investment level as $10,000, a return of 8% a year, and a holding period of 17 years. The final results? Janus Twenty would have a value of $31,859.54 and Oakmark Select a value of $31,375.83.

Don't overlook mutual fund fees and expenses, they play a very important role in choosing a mutual fund!