Investments, tenth edition

   Fee Structure 

 An individual investor choosing a mutual fund should consider not only the fund’s stated 

investment policy and past performance but also its management fees and other expenses. 

Comparative data on virtually all important aspects of mutual funds are available in 

Morningstar’s  Mutual Fund Sourcebook,  which can be found in many academic and 

public libraries. You should be aware of four general classes of fees. 

  Operating Expenses   

Operating expenses are the costs incurred by the mutual fund 

in operating the portfolio, including administrative expenses and advisory fees paid to the 

investment manager. These expenses, usually expressed as a percentage of total assets under 

management, may range from 0.2% to 2%. Shareholders do not receive an explicit bill for 

these operating expenses; however, the expenses periodically are deducted from the assets 

of the fund. Shareholders pay for these expenses through the reduced value of the portfolio. 

 The simple average of the expense ratio of equity funds in the U.S. was 1.43% in 2011. 

But larger funds tend to have lower expense ratios, so the average expense ratio weighted 

by assets under management is considerably smaller, 0.79%. Not surprisingly, the average 

expense ratio of actively managed funds is considerably higher than that of indexed funds, 

.93% versus .14% (weighted by assets under management). 

 In addition to operating expenses, many funds assess fees to pay for marketing and 

distribution costs. These charges are used primarily to pay the brokers or financial advis-

ers who sell the funds to the public. Investors can avoid these expenses by buying shares 

directly from the fund sponsor, but many investors are willing to incur these distribution 

fees in return for the advice they may receive from their broker.  

    4.4 

Costs of Investing in Mutual Funds 

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P A R T   I

 Introduction