Are mutual fund performance numbers reported net of fees (operating expenses and 12b-1)?
Operating expenses (record keeping, accounting, custodial, etc.) and 12b-1 fees (marketing and advertising) are included within the fund and thus reported net of those fees. But brokerage fees and especially loads (sales charges/commissions) are not included. That said, there are too many low cost, no load mutual funds that can replicate or at least are very similar to loaded funds that there is no reason to pay a load - front end A share, back end B share, or any other share with a load - that you should avoid. And many funds will have different classes of funds and will report the various returns after consideration of the loads and/or different fee structures. You will be able to see the difference in their returns. So if you plan on using mutual funds, choose wisely.
Another alternative is an Exchange Traded Fund or ETF. Think of this as a "hybrid" mutual fund where you can get immediate diversification, low cost structure, but also trades during the day. This is in contrast with a mutual fund where you can only buy or sell at the end of the day Net Asset Value or NAV. ETFs simply provide you more flexibility and are growing in popularity. Just like a mutual fund though, you must do your research and see how and what the underlying investments are within the ETF (or mutual fund).
If you are passively investing in low cost, indexed funds either will work just fine. If you are more active, then ETFs are normally a better choice.
Hope this helps and best of luck, Dan Stewart CFA®
Most times they are. You may go onto the mutual fund's web site and read the fine print to make certain. Sometimes they quote with and without operating expenses and 12b-1 which is referred to as their "expense ratio". Other sources like Morningstar will have an analysis of the portfolio, performance, and fees net of the expense ratio.
Please feel free to read the attached article that will go over in greater detail what is important when buying a mutual fund: http://www.investopedia.com/advisor-network/articles/consider-these-fees-when-evaluating-mutual-funds/
Looking at its track record or performance history is not always the best indicator of the best mutual fund to buy.
As I mentioned above, the annual cost of a owning a mutual fund is called the expense ratio. The expense ratio is the percentage of the fund’s assets that go toward running the fund. Management fees, administrative costs, and 12b-1 fees.
- Management fees or investment advisory fees go to pay the portfolio manager.
- Administrative costs are for operating expenses like recordkeeping, client mailings, maintaining a customer service phone line, etc. These vary with the size of the fund.
- The 12b-1 fee is for marketing and advertising. It also includes trailer commissions paid to the broker of record as an incentive to sell the fund. It works like an annuity for the sales person over the life of the fund. It is usually paid to the broker quarterly as it is taken out of the net asset value of the fund fractionally.I have seen some funds that are closed to new investors and are still charging 12b-1 fees so be sure to get all of your questions answered prior to buying.
Using the services of a financial advisor would give you more details into the fund as well as working with you and identifying your individual investment goals and risk tolerance.
The answer depends on how you define "operating expenses."
Let's look at a cinematic metaphor to clear up this apparent ambiguity. A mutual fund's cost is similar to the cost of going to your local movie theater. Let's assume that the price of a movie ticket is $8. Snacks like popcorn, soft drinks and candy can easily add another $4 to the total cost of this entertainment, which means that it really costs you $12 to go to the movies.
A similar situation applies when it comes to the total costs for a mutual fund investor. There are four components to a fund's cost structure, two of which are deducted from a mutual fund's performance, which gives us its total return. Operating expenses (investment management, record keeping, custodial services, taxes, legal, accounting and auditing), expressed as the expense ratio, and a marketing/distribution fee (referred to as a 12b-1 fee, if there is one) is charged against the fund, which means that its total return is a net figure.
In addition, a fund incurs transactional costs – brokerage fees for buying and selling portfolio securities and spread differences between the bid and ask prices – which are not included in the expense ratio but certainly seem to qualify as operational expenses. These can be a significant expense item for a fund with a high portfolio turnover. Lastly, if your fund has a sales charge (load), that fee is also not included in its expense ratio.
In view of the above, a mutual fund's expense ratio is much like the price of a movie ticket in our example, while the transactional costs and sales charges are the equivalent to what a moviegoer spends at the refreshment counter. Obviously, neither the movie ticket price nor the expense ratio captures the respective total cost of a trip to the movies or a mutual fund investment.
When considering costs and expenses, a mutual fund's investment quality increases with the absence of sales charges and 12b-1 fees and the presence of low expense and portfolio turnover ratios. It is a matter of record that low-cost funds outperform high-cost funds.
The reader should note that because redemption fees for early withdrawals from a fund are controlled by the investor, not the fund company, they do not figure into this discussion.
To learn more, see Picking The Right Mutual Fund.
Yes. And that's the great thing about performance numbers on mutual funds, index funds, and ETFs. They are all reported net of all fees. The only time you have to be concerned about additional fees is if you also have a financial advisor. Their fees are on TOP of fund/ETF fees and you would only see your performance net of ALL fees (including the advisor fees) on your advisor's statements (in most cases).
Investopedia gave you a really great explanation to your question, so I'll simply add the following; what you should primarily look for is total return to review historical performance. If you rely on charts to help you evaluate mutual fund performance, it should be recognized that any kind of distribution (dividends, capital gains, etc.) is usually going to be reflected in the performance by way of a drop in the NAV of the fund.
I'm pretty careful to not give advice without knowing full information about an investor, but I can always sign off on this, by no means should you consider a fund with front or back-end sales loads. In this day and age, I am amazed that investors are still considering these products (or are being recommended them by commission-based advisors).
Adam Harding, CFP