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Hidden Fees
It is absolutely amazing. No matter how much the mutual fund industry tries to reinvent themselves as the friendliest investment vehicle for small investors, there seems to be an ongoing attempt at making it harder and more difficult to not only compare funds but to also assess their overall costs. What is a simple investor to do?
In the financial world of money management, the more invested, the less the service costs. This is why investors who have seven figures sums or more to invest often find themselves in hedge funds. But big investors do use mutual funds. And when they do, they are often offered the same relative service as small investors, but at a significant discount.
Gateway fees, the cost of opening a mutual fund have been gradually rising, keeping new investors from making their first leap into the world of investing for retirement. Many still offer significant discounts for IRAs, but even that is changing with fee structures that tap returns without investors realizing it is happening.
Mutual funds have now made inroads into better than half the households in America. This took incredible drive through advertising, and of course, the bull markets of the nineties didn't hurt their efforts. But with those days well behind us, and redemptions (when folks pull their money out because of bad performance) slowing to a trickle, funds are looking toward hidden fees, the ones that the Security and Exchange Commission does not require listed in their table of fees, are beginning to intrude.
Maintenance fees have now become the norm. Vanguard charges $10 to maintain your account if the balance is less than $2,500. Should you care? If you are an investor who is just beginning, the cost is well worth it. It may erode the returns on your money somewhat, but it is less than the cost or difficulty in maintaining and managing an account of your own design. Consider the difference in expenses between an account whose balance is $1,000 and $100,000. On the larger account, that 0.18% expense fee that Vanguard charges amounts to $180. On $1,000 it is $1.80. The outrage comes when you add the ten bucks to that fee. On an account that size, the true expense climbs to almost 2%. That's a huge difference.
The lesson to be learned here as mutual funds create their own class system, is diversification in the mutual fund industry should be limited to three to four funds with your goals in mind. Spreading yourself into more than five funds raises the risk that hidden fees are eating away at your returns.
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