April 5, 2013
What is the primary way an investment company makes money managing a mutual fund?
What is the primary way an investment company makes money managing a mutual fund?
Investment companies make money through commissions and uninformed investors letting them take a piece of their total investment return.
You were a little off on this one, Katherine. What you described is how a financial advisor/insurance agent/investment broker makes his or her money. When you pay a commission it goes to the salesman, not the investment company.
The investment company (Vanguard, Fidelity, Janus, American, etc.) will make most of their money through the expense ratio. This fee comes out during the year in very small increments that you will never see. The wise investor keeps this number to the lowest possible denominator. This means investing in index funds that charge something below .3% and with admiral shares at a place like Vanguard the cost can reach a level closer to .1%. Now that is efficient.
You can learn more by going to vanguard.com and researching the different types of funds. Focus on the broad based diversified index funds. Here are a few of my favorites: the Total Stock Market index fund, the International index fund, the Small-cap index fund, the REIT index fund, and finally the Large-cap Value index fund. As for bonds, you can’t go wrong with the Total Bond Market index fund or the Short-term Bond index fund. Educate and ACT!
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