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Mutual Fund Fees Will Reduce Your Total Returns

All mutual funds charge fees (some are hidden) to manage your money and high fees substantially reduce your total returns. Annual fees of one and two percent may seem small but such fees are deceptively large when you compute their arithmetic impact on long-term returns.

The examples in this article evaluate the effect of annual fees of a hypothetical mutual fund. The examples assume you invested $10,000 and received a six percent annual return. The annual fee in dollars is computed after the gain in dollars is computed for the year.

Effect of Annual Fees on Total Return - You Won't Believe the Numbers

The Total Value table shows the total return for different annual fees and years held. As expected, the total return decreases as the annual fee increases. For example, your initial $10,000 investment with no fees is worth $57,435 after 30 years. But with a 2 percent fee it's worth only $31,330. You give up $26,105 to have the mutual fund manage your portfolio. The figures seems impossible, but the arithmetic tells the story.

Total Value and Years Held
Annual Fee
Years Held
0%
0.25%
1%
2%
1
$10,600
$10,573
$10,494
$10,388
5
$13,382
$13,216
$12,726
$12,096
10
$17,908
$17,466
$16,196
$14,633
20
$32,071
$30,505
$26,231
$21,411
30
$57,435
$53,280
$42,485
$31,330


The impact of the fee increases as the number of years held increases and this impact is amplified as fees increase. This is due to the compounding effect. As the investment grows in value due to compounding the fees grow accordingly. Therefore, the higher the fee and the longer the investment grows the bigger the bite from fees.

The next table shows the effect of fees in percentages.

Percent Reduction In Total Value Due to Fees
Annual Fee
Years Held
0.25%
1%
2%
1
0.2%
1%
2%
5
1.2%
5%
10%
10
2.5%
10%
18%
20
5%
18%
33%
30
7%
26%
45%


For example, the percent reduction for a 10-year total return with a 0.25 percent fee is only 2.5 percent. But the reduction for a 30-year return with a 2percetn fee is 45 percent.

For all fee amounts, the hit of total returns increases significantly as the holding period becomes longer.

Total Fees

The Total Fees table shows the total fees paid. The total fees accumulate rapidly as the annual fee and the number of years held increase.

Total Fees
Annual Fee
Years Held
0.25%
1%
2%
1
$27
$106
$212
5
$149
$585
$1,146
10
$345
$1,330
$2,531
20
$947
$3,483
$6,235
30
$2,000
$6,970
$11,654



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