Mutual fund fees jump five percent as market tanks

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Across the board, investors are paying higher fees for their mutual funds now that the market has tanked. That's according to a new study conducted by MorningStar for CBS MoneyWatch.com, whose Alan Roth has an interesting write-up on the results.

The long and short of it is this: Mutual funds collect their fees based on a percentage of assets under management. So the fact that the market tanked 40 percent reduces revenue by 40 percent, assuming that the expense ratios stay the same. The problem is that expenses don't fall in line with the market, so the mutual funds need to raise fees.
How much have expense ratios moved? The expense ratio on the average domestic equity fund moved from 1.34 percent to 1.39 percent over the past year.

Here's how that works out in real dollars. Let's say that you invest $100,000 in each of two funds -- one with an expense ratio of 1.34 percent and one with a ratio of 1.39 percent -- and both funds earn an average annual return of 9 percent before fees. After 10 years, your stake in the fund with the expense ratio of 1.34 percent will be worth $209,191.37. The stake in the fund with the expense ratio of 1.39 percent will be worth $208,221.86.

In other words, the uptick in average expense ratios is really not something you need to worry about -- it's too small to really matter. But the difference in fees between an actively managed fund and a passively managed index fund will be substantial enough to impact your wealth in the long run.

Bottom line: Don't fret too much about the increase in average expense ratios. Instead, focus your mutual fund investing on low-cost index funds.
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