# If You Invest in Mutual Funds, Read This

The majority of investors are familiar with mutual funds and the concept of owning a diversified pool of stocks. You purchase one share of a mutual fund and in turn get exposure to all of the individual stocks the fund holds. By owning multiple stocks, you limit the amount you can lose. In other words, you don't have all of your eggs in one basket.

## Determining Advisory Fees on Investments

Most investors look at their advisory statement and can see the quarterly or yearly advisory fee they pay from their account. This fee is pretty straightforward.

The advisory fee might be 1%, and is the total asset management cost. It's possible the mutual funds in your portfolio are also charging a fee, but that fee never shows up on your advisory statement. This is called the expense ratio.

## Calculating the Expense Ratio

According to Investopedia, "The expense ratio is a measure of what it costs an investment company to operate a mutual fund." It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs and all other asset-based costs incurred by the fund. (For related reading, see: Pay Attention to Your Fund's Expense Ratio.)

Calculating expense ratios is pretty straightforward as long as you have the ticker symbol of your mutual fund. You can find the ticker by looking at your statement or searching the full name of the fund online. Once you have the symbol, you can do another search to find an image like this:

From this example, you can see the Fidelity Contrafund has an expense ratio of .68%. If you were paying your advisor 1%, your all-in fees would actually be 1.68%.

## How Fees Are Paid

The way these fees are paid is not very transparent—they can come out of your portfolio in a couple of different ways.

### 1. Taken From Your Dividends

Let’s say your mutual fund with an expense ratio of 1% is worth \$100 a share and pays a 2%, or \$2.00, dividend per year. At the end of the year, when you get paid your dividends, instead of getting back \$2.00, you only get \$1.00. The fee comes out of your profits and you never see it as a line item on your statement.

### 2. Taken Directly From the Fund in Cash

For mutual funds that don’t pay a dividend, some of the shares in the fund can be sold instead of being vested, and the cash can be used to pay the fees. Let’s go back to our mutual fund with an expense ratio of 1% that is worth \$100 a share. When it comes time to deduct the fees, some shares are sold in the fund, and the cash is removed. The day after this happens you look at your statement and see the fund is now only worth \$99 per share. Unless you knew what was happening, this would just appear as a price fluctuation due to the market. However, in reality, this was your fee coming out. Again, unless you knew what the expense ratio was, you would never know you just paid a fee!

## Don't Assume Your Statement Shows Everything

You can’t just look at your yearly statement and assume you know what you are paying. Therefore, it is in your best interest to ask your financial professional questions about the all-in fees you are paying. If there are less expensive options out there that can help you accomplish the same financial goals, wouldn’t you want your money working harder for you?

If you are managing your investment assets on your own, check the expense ratios of the funds you own. If any of your expense ratios are between .50% and 1%, it’s time to explore some comparable lower-cost options. If you are paying over 1%, it’s time to switch to a lower cost option.

(For more from this author, see: How to Start Investing With Just \$100.)