Mutual Fund Fees

Today's Wall Street Journal had an interesting article discussing mutual fund fees. When most people talk about the average fee for a mutual fund they are talking about the arithmetic mean (which means, you add up all the fees for all the mutual funds and divide that number by the number of mutual funds). According to Lipper Inc., which tracked over 10,000 mutual funds, this average is 1.573%. So, if you have a mutual fund with an expense ratio of 1.25%, you're doing good, right? Not so fast.

A better way to calculate what the average investor is paying in fees is to use the dollar-weighted average fee. According to Lipper, calculated this way, the average fee is .936%. That's quite difference! Why is there so much difference? It is because most of the investors and most of the money is invested in the bigger mutual funds which typically have lower costs.

So, the next time you are sitting with your broker and he or she tells you "this mutual fund has a below average expense of 1.25%..." you can correct them.

Link: How to Look at Mutual-Fund Fees