Investing
How does a mutual fund make money? How does a fee-based advisor make money? How can you reduce your costs when investing?
How does a mutual fund make money? How does a fee-based advisor make money? How can you reduce your costs when investing?
A mutual fund makes money with their expense ratio. The expense ratio pulls most of the cost that is incurred with the fund into one number and that amount comes out of the fund each year as a small percentage during the trading days. The average expense ratio runs around 1.25%, but that can vary in some pretty big ways.
A fee-based advisor makes money with a load. It will be a class A, B, or C in almost all cases. The average A load comes out upfront and runs around 5.75% in most cases. The class B load comes out in the rear when selling and can vary by quite a bit. This load is rarely used anymore. The class C load comes out while you own the mutual fund and it usually runs a standard 1%. Those loads are part of the cost of owning mutual funds when adding them to the expense ratio.
You can reduce the costs by avoiding fee-based advisors (and their loads) by going straight to the investment company (Vanguard would be my recommendation). You can reduce the costs dramatically by sticking with an all index portfolio of mutual funds. This could drop your expense ratio down to .10% or so. Higher returns will follow! Learn more by hitting on the menu tab on this website and going to the investing link.