Recent Trends in the Cost of Fund Ownership

Research by the Investment Company Institute finds that since 1980, the average cost of equity mutual funds has decreased 45 percent; bond funds, 42 percent; and money market funds, 38 percent.

Total Shareholder Cost
The Institute evaluated fee trends using a comprehensive measure called total shareholder cost. This measure represents the cost that an investor would expect to incur in purchasing and holding mutual fund shares.

The fees and expenses included in total shareholder cost consist of fund operating expenses, 12b-1 fees and sales loads. In contrast, most other measures used to analyze mutual fund ownership cost do not account for sales loads and do not accurately reflect total shareholder cost.

Total shareholder cost accounts for all major fees, expenses and sales charges and is based upon the same considerations underlying the fee information required by the U.S. Securities and Exchange Commission in every mutual fund prospectus.

Mutual Fund Fees Decrease Since 1980

Costs Decline Across the Board
The decline in mutual fund costs holds true even after excluding types of funds-equity funds of the three largest fund companies, index and institutional funds-that typically have lower shareholder costs.

Shareholders Benefit from Choice and Disclosure
An important source of the decrease in total shareholder cost was a shift by investors toward funds with relatively lower costs. Although shareholders have a wide array of funds from which to invest, most generally have tended to purchase and hold funds that cost in the lower half of the range of available choices. Seventy-seven percent of all investor accounts are in funds that charge less than the industry average.

Most Investor Accounts Are in Lower-Cost Equity Funds

Investors can easily become fee sensitive by learning which fees a fund charges by looking at the fee table in the front of the prospectus. These fees are subject to more exacting regulatory standards and disclosure requirements than any comparable financial product offered to investors.

The fee table lists the actual level of fees and then applies them in an easy-to-understand hypothetical to illustrate their impact over time. The fee tables makes it easy for shareholders to compare costs and services among different funds.

Fund Directors Oversee Fees
The fees and expenses mutual fund shareholders pay are subject to ongoing oversight and review by the fund's board of directors, including its independent directors. Fees are a major consideration when directors approve or renew the contract of a fund's investment adviser. Directors are responsible for ensuring that the level of fees paid by shareholders is reasonable, and that shareholders receive value for the fees they pay. Directors also review and vote on fees and contracts with a fund's distributor, the custodian of the fund's assets, and other service providers.

Shareholders Benefit from Economies of Scale
Recent Institute research has found that mutual fund operating expense ratios generally decline with asset growth and that larger funds have lower expense ratios than smaller funds. This strongly suggests that most equity fund shareholders have benefited from economies of scale.

The Institute examined a group of 497 equity funds, representing about three-quarters of all equity fund shareholder accounts and 71 percent of equity fund assets in 1998. Of this group, 74 percent, or 368 funds, lowered their initial operating expense ratios as each grew to exceed $500 million in assets. Funds that grew the most tended to experience the sharpest reductions in their costs. Even though 21 percent, or 106 funds, had higher operating expense ratios in 1998 than their initial expense ratio, research found that these increases tended to be modest. Funds in this group tended to have low initial operating expense ratios. In fact, nearly half of these funds had initial operating expense ratios in the lowest 20 percent.

Most Funds Post Significant Drops in Operating Expense Ratios
(number of funds)

Institute research also found that large equity mutual funds typically have lower operating expense ratios than small equity funds. For example, equity funds that exceed $5 billion in assets have average operating expense ratios that are 50 percent lower than equity funds with assets of $250 million or less. This reinforces the previous finding and indicates that shareholders enjoy lower costs as funds grow.

For the latest legislative and regulatory developments concerning these and other related issues, return to the Fees and Expenses index page.