Be Aware of Hidden Costs Lurking in Funds

Physician's Money Digest, April 2007, Volume 14, Issue 4

SmartMoney

SmartMoney

The savvy physician-investor is alreadyaware of upfront fees that come hand-inhandwith their mutual funds (eg, managementfees, distribution fees, and otherexpenses), and they know to keep tabs onthem. However, what many investors don'trealize is that there's a hidden charge,even on the most inexpensive funds, thatcan add up: transaction costs. Accordingto a recent article in , allfunds—even index funds—tack on brokeragecosts when managers buy and sellstocks. These costs aren't included in theexpense ratio (ie, the fund's total annualoperating expenses), but are taken from afund's assets. The article cites informationfrom fund tracker Lipper, which found thatFidelity Discovery, for example, racked up$65 in brokerage commissions for every$10,000 invested—nearly doubling thefund's published expenses. Lipper alsofound 51 domestic equity funds with tradingcosts of more than 1%. There aremany reasons why brokerage commissionsmay run high. Some funds chargemore for fast execution or more liquidity,says , while other big fundsspread their trades among several firms toremain below the competition's radar.Whatever the reason, the investor needs tokeep an eye on portfolio turnover.