Mutual Fund Calculator

A mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds or other securities, managed by a professional adviser and priced once a day at its net asset value (NAV). Funds make diversification easy and cheap for small investors, but every fund has costs, and some charge a lot. Because fees come out every year whether the fund does well or not, they compound against you just as returns compound for you.

With the defaults, $20,000 plus $1,000 a month in a fund earning 5% before costs grows to about $90,077 after five years. That is $10,077 more than the $80,000 put in, an internal rate of return of about 3.84% a year. The 2% sales charge takes $1,600 off the top and the 0.5% expense ratio about $1,324 more. The IRR is lower than the gross 5% because of both costs, and because the load is charged on money that has not yet had time to grow.

The IRR is the most useful single number for comparing funds with different fee structures: it is the steady yearly return that would turn your actual deposits into the actual ending value.

Mutual fund fees and expenses

Fund costs come in two forms: transaction fees charged when you buy, sell or exchange shares, and periodic fees taken from fund assets every year. All of them are listed in the fee table near the front of every fund's prospectus, which also shows a standard example of the total cost of a $10,000 investment over one, three, five and ten years.

Net IRR: Σ Cₜ ÷ (1 + IRR)ᵗ = 0

Cₜ

cash flow at time t: purchases negative, ending value positive

IRR

the yearly rate that makes all cash flows net to zero

The fund grows at the rate of return minus the expense ratio; sales charges are taken from each purchase and the deferred charge from the final value.

Transaction Fees

These are paid directly by the investor at the time of a transaction.

• Front-end load (sales charge on purchases): a commission deducted from each purchase, typically on Class A shares. A 5% load on a $10,000 purchase invests only $9,500. FINRA rules cap sales loads at 8.5%, and most funds offer breakpoints, discounts on larger purchases, often starting at $25,000 or $50,000. Rights of accumulation and letters of intent let you combine holdings or planned purchases to reach a breakpoint.
• Back-end load (deferred sales charge): charged when shares are sold, usually on Class B or C shares. A contingent deferred sales charge often starts at around 5% and declines each year the shares are held until it reaches zero. Class C shares commonly charge 1% if sold within the first year.
• Redemption fee: a charge, capped at 2% by SEC rule, that some funds impose on shares sold within a short period after purchase to discourage frequent trading. Unlike a load, it is paid to the fund itself.
• Exchange fee: a charge some funds impose for moving money into another fund in the same family.
• Purchase fee: a fee paid to the fund, rather than a broker, to cover transaction costs of investing new money.
• Account fee: a separate charge some funds levy for maintaining an account, often only on balances below a minimum.

No-load funds charge no front-end or deferred sales loads, and most funds sold directly by large fund companies and through online brokerages fall into this group. Paying a load makes sense mainly when you are paying for advice you value; otherwise, a comparable no-load fund keeps the money working for you.

Periodic Fees

Annual fund operating expenses are deducted from fund assets every day, so you never see a bill, but they reduce the returns you receive. They are expressed as the expense ratio, a percentage of assets per year.

• Management fee: paid to the fund's investment adviser for selecting and managing the portfolio. It is usually the largest part of the expense ratio for actively managed funds.
• Distribution and service (12b-1) fees: used for marketing, sales and shareholder services, capped at 1% of assets a year, of which no more than 0.25% can be a service fee. A fund can call itself no-load only if its 12b-1 fee is 0.25% or less.
• Other expenses: custody, legal, accounting, transfer agent and administrative costs.
• Acquired fund fees: for funds of funds, such as many target-date funds, the expenses of the underlying funds.

Expense ratios vary widely. Broad stock and bond index funds from large providers often charge well under 0.1% a year, while actively managed funds commonly charge 0.5% to 1% or more. Over long periods the gap is large: on a $100,000 portfolio growing 6% a year for 25 years, a 1% annual cost leaves roughly $80,000 less than a 0.1% cost. Trading costs inside the fund, which are not part of the expense ratio, add a further hidden drag for funds with high turnover. Look up any fund's expenses in its prospectus or with the FINRA Fund Analyzer before you invest.

Frequently asked questions

Sources

• Investor.gov – U.S. Securities and Exchange Commission
• U.S. Securities and Exchange Commission
• FINRA – Financial Industry Regulatory Authority