Mutual Fund Expense Lies

 

When purchasing mutual funds we are cautionedto read the prospectus, look at pastperformance, check out the fund manager's recordand see what their expense ratios have been.

We are also told that we should not buy fundswith expenses exceeding 1% to 1.5%. When you askthe fund salesman (don't forget he's a salesman)he will assure you that the fund expenses arewhatever is shown in the prospectus. He istelling you the truth, but not the whole truth, according the Securities and Exchangeregulations. In many cases he has left out a bigchuck of expenses.

The 1.5% expense means you are paying $150 eachyear of every $10,000 you have invested withthat fund. The lower the expense is the more ofyour money is at work. As a fund becomes largermeaning they take in more money the expenseratio should drop, but it rarely does. he fundmanager must make 1.5% to have your money stayeven.

If you can find your way around the Securitiesand Exchange Commission internet web site youwill find that the definition of expense ratioleaves out commission charges. Many funds willturn over their portfolio by 100% in a year. Obviously they are not going to buy and sell atno charge. The floor broker must be paid acommission for each share that is executed.

Sometimes brokerage fees are purposely inflatedand the broker kicks back favors(they don't callit that) such as research information, freecomputers and other favors. Been to theHampton's or Hawaii for that all-expense weekendseminar? Course not.

The SEC does not require that this commissioncost be disclosed as an expense. Why? Theiranswer is pure government hokum, "We excludebrokerage costs because we have always excludedbrokerage costs". This is the SEC that issupposed to be the watchdog for the investor.

Fund managers say these costs are insignificantand that investors should look at the fund'sperformance. If they did that and reallyunderstood what they were looking at theyprobably wouldn't buy 90% of the domestic stockfunds.

This is just another example of how theinvestor has the wool pulled over his eyes andanother reason I find prospectuses worthless.

 



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