All Other Things Being Equal, Keep your Costs Low: Part 2

Transaction Costs
Transaction costs are not included in the expense ratio, nor are they disclosed in most prospectuses. They average approximately 1.44% annually. The three most common ones are: brokerage commissions, market impact, and spread cost.

Brokerage Commissions. Brokerage commissions come from mutual fund managers who buy and sell stocks for mutual fund investors in company’s brokerage account(s). Calculating the additional expenses attributable to this “turnover” can be difficult. They can be estimated using information found in the Statement of Additional Information.

Market Impact Costs. Market impact costs are a consequence of the large amounts of trading conducted by such mutual funds. They save on some costs due to the volume of transactions, but the flip side of that is that their large sales or purchases can immediately affect market prices. As a result they end up buying higher or selling lower than they had planned.

Spread Costs. Like market impact costs, spread costs occur when a fund buys and sells stocks. It is essentially the opportunity cost as measured by the difference between the best-quoted ask price and the best-quoted bid price.

Investment Advisor Fees
This fee applies only to those working with fee-based investment advisors who select mutual funds for their clients. Advisors typically charge an annual fee between 0.25% and 2.5% for managing an investor’s portfolio.

Other fees include Commissions, and Sales Load, a one-time fee when you either buy into a fund (Front-End Load) or redeem the shares in a fund (Back-End Load). There are also funds that charge no additional fees (No Load).