"The Real Cost Of Owning A Mutual Fund"

"...Expense Ratio

The expense ratio is frequently the only cost that many investors believe they pay when owning a mutual fund. The expense ratio is frequently used to pay marketing costs, distribution costs and management fees...

Transaction Costs

...U.S. Stock Mutual Funds average 1.44% in transaction costs per year. These costs can be difficult to determine, are not found in most prospectuses, and are not included in the aforementioned expense ratio.

...1. The first type of transaction cost is brokerage commissions. Brokerage commissions result from mutual fund managers buying and selling stocks for mutual fund investors...

2. The second transaction cost even more difficult to estimate is market impact cost. ...“A mutual fund making a large transaction in a stock will likely move the stock price before the order is completely filled.”

...individuals receive less favorable prices on certain stocks being bought and sold. This occurs when an investor’s mutual fund manager is buying or selling large quantities of stock that drives the price artificially higher or lower.

3. ...Spread cost reflects the difference between the best quoted ask price and the best quoted bid price. ...Generally, it is more excessive when a mutual fund is trading international or smaller, less liquid stocks (3).

Cash Drag

...Cash is frequently held by mutual fund managers to maintain liquidity for potential transactions and potential redemptions by mutual fund owners. ...the average cost from cash drag on large cap stock mutual funds over a 10-year time horizon was .83% per year. This cost results from investors paying the mutual fund’s expense ratio on 100% of the money invested despite the fact that not all of the assets are invested into stocks or other securities.

Soft Dollar Cost

...This cost comes into play when mutual fund managers are buying and selling stocks within the mutual fund’s brokerage account(s). Frequently, mutual fund managers may direct the money being managed to brokerage companies providing them with research and/or other services, even if the brokerage companies are not providing the most cost efficient brokerage commissions involved with buying and selling stocks. ...This effectively keeps this cost out of the public’s eye, giving a fund the artificial appearance of lower than actual expenses.

Advisory Fees

...Many fee-based advisors will manage an investor’s portfolio for an annual fee commonly ranging from .25% to 2.50% of the portfolio’s balance. This fee is required to be disclosed on investors’ statements, and is charged in addition to the other mutual fund costs discussed.

...hidden costs have infiltrated the mutual fund industry and are being paid by many unsuspecting investors..."

Ty A. Bernicke

http://www.forbes.com/2011/04/04/real-cost-mutual-fund-taxes-fees-retirement-bernicke.html