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Calculating the Cost of Investing in a Mutual Fund

Investors invest because they want their money to earn for them. To maximize earnings or return on investment, investors should minimize the cost. Thus, when it comes to investing in mutual funds, you should always look for a mutual fund that has performed well in the past and also cost you the least.

Why Mutual Fund Fees and Costs Are Important

A mutual fund's past performance is not a very reliable indicator of a fund's future performance. Therefore, a fund's historical performance is not the only thing you should consider when choosing a mutual fund in which to invest.

One of the important factors that you should consider when deciding whether or not to invest in a mutual fund is this fund's fees and other costs you'll incur for investing in it. According to experts, a mutual fund's fees are a fairly reliable indicator of a fund's future performance.

Specifically, a mutual fund's fees can add up over time. This can eat up a significant part of your returns.

Knowing the costs of investing in particular mutual funds can help you choose a mutual fund. If you are considering several mutual fund products, for instance, and are finding it difficult to decide which of them is the best, you can calculate the costs of each mutual fund. Then you can simply pick the mutual fund that would cost you the least over time.

Of course, you should not base your decision on costs alone. You must always use a variety of factors when comparing mutual funds. For instance, you could first rank your choices according to the type of securities in its portfolio (and how they fit your diversification objectives), the risk levels associated with the fund and its investments, the investment timeframe involved, the fund's past performance, etc. Once you have come up with a shortlist of the best mutual fund prospects, you can compare these mutual funds' total costs of investment.

How to Calculate the Cost of Investing in a Mutual Fund

There are various tools that you can use to calculate the costs of investing in a mutual fund. Here are two of them:

SEC Mutual Fund Cost Calculator: You can find this tool at the SEC website. To use this tool, you need to have expense information about the fund so keep the fund's prospectus handy.

Specifically, you need the following information to calculate the cost of a mutual fund using the SEC Mutual Fund Calculator:

  • the number of years you plan to hold on to the fund
  • the value (in dollars) of your investment
  • the fund's general classification or type (e.g. is it a money market fund, a bond fund or a stock fund?)
  • the expected annual rate of return
  • the sales load or sales charge rate on purchases
  • the deferred sales charge rate
  • whether the security converts to another class after a certain period of time
  • the fund's expense ratio

FINRA Fund Analyzer: You can find this tool at the FINRA website. This tool is more advanced than the SEC Mutual Fund Cost Calculator. Through this tool, you can compute costs for up to 3 mutual funds at a time. You can also use this tool to analyze the costs of investing in Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).

To use the tool, all you have o do is to enter the names of up to 3 mutual funds. You can simply search the name or the symbol, select the fund from the results, then click the arrow beside the search box to proceed or add the fund to the list of funds you want to compare.

Next, click "Show Results." The results will appear immediately below the search window. Tweak the parameters - the dollar value of investment, the annual rate of expected return, and your intended holding period. This will refresh the results page.

The FINRA Fund Analyzer gives a very detailed expense analysis of mutual funds. Through this tool, you can see what a fund's redeemed value would be every year, how much profit you'll make (or loss you'll suffer, in case of a negative annual rate of return) each year, and the cumulative fees and expenses you'll pay every year you stay in the fund. It also provides a fee discount report when such information is available.

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