The best mutual fund cost calculator - in action!

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What I’m going to illustrate here is what it would have cost you to own a specific mutual fund last year, using the mutual fund cost calculator.

I’ve created an image (below) that you can click to enlarge. Within the image, I’ve highlighted 14 different areas that I will expand upon throughout this post.

I randomly selected a mutual fund that showed up on the results pages of the Kiplinger fund finder post from a few days ago. The name of the fund is the American Beacon Large Cap Growth Fund (ALFIX), a no load mutual fund.

Just answer a few simple questions

I then went to PersonalFund.com (btw, you have to create an account there using a valid email and password, which takes less than a minute to do) and inputed the name of the fund and a few other facts:

In our case: ALFIX

• How much are you investing? $50,000
• What type of account is it in? Taxable
• How long do you expect to hold the fund? 10 years
• Expected annual rate of return? 12%
• Tax rate for ordinary income? 28%
• For dividends and long term capital gains? 20%

After inputing this information, the calculator returned the following results, which can be viewed by clicking the image (below). I’m going to make a few comments about each of the highlighted numbers (in red)

(click to enlarge)

#1 - They start with an analogy to break things down for you. As you may or may not know, I love using analogies too; probably why I liked this site from the get go. The estimated total cost of ownership last year was 3.05%. They liken it to riding a horse with a 305 pound jockey.

#2 - The name of the fund I used in this example (ALFIX)

#3 - The total cost of ownership last year was 3.05% or $1,525. ($50,000 x .0305= $1525)

#4 - The projected future value of ALFIX in 10 years is $89,525, if grown out at a rate of 9%. Please remember this column will always grow the investment at the hypothetical rate you entered 9%.

#5 - This column depicts the actual returns of all the funds listed. Included here is our fund (ALFIX), followed by 4 different solutions the calculator came up with, all having a fraction of the internal fees of ALFIX.

Ironically enough, the difference in last year’s actual returns, between the funds, is nearly the same as the difference in fees. This drives home the point about the 305 lb jockey vs the 52lb jockey. Under normal conditions who’s more likely to win the race? Obviously the 52lb jockey.

Well this site helps you to find and compare the most cost effective jockeys on the investment track.

#6 - (FSMKX) had a total cost of .52% last year. Tremendously more cost efficient than (ALFIX) at 3.05%.

#7 - This is the most important line on the whole page. This number 2.24% represents your share of the fund’s trading costs, which are listed on the obscure SAI (Statement of Additional Information) document overlooked by most investors. To refresh your knowledge, go to my post on mutual fund hidden fees.

Also, be sure to click on the accompanying link (within personalfund) to learn more about how they arrived at this number.

#8 - The amount you paid for professional fund management. It’s self explanatory, click the link for more. Comparatively speaking, this number is pretty low, a lot of funds have an expense ratio over 1%.

#9 - There is no cost for fund distribution, this is a no load fund. If you recall, fund distribution fees are only assessed if the fund was purchased through a financial advisor.

#10 - This is an estimate of what your taxes would have been for owning this fund. Remember, when mutual funds buy or sell stock, they pass these gains on to fund investors, via capital gains distributions. Dividends are taxed at 28%, the rate we entered at the top of the page.

#11 - This is not a realistic number. This line shows you the future value of the fund, 10 years from now, at 9%, if there were absolutely no costs. It’s really only here, for the sake of comparing the impact of a fund with high costs vs no cost.

#12 - The projected actual value of the fund in 10 years is $89,525.

#13 - By subtracting line 12 from 11 you get this number $28,843

#14 - This line drives home the point of what high internal costs will do to your returns over the long run. Although 42% erosion is listed, its more a point of reference since (ALFIX) is being compared to an investment with no costs, which is unrealistic.

But the point is driven home, more realistically, by comparing the projected value of a real investment IVV (which by the way is an ETF) to the value used in #11. Investing in a more cost effective ETF, in this case IVV, results in a projected value of $113,169.

A few words about ALFIX

There are certain assumptions the mutual fund calculator uses to arrive at these numbers, which are detailed by clicking on any of the hyper links found at the site. (not found in my image, in case any of you tried to click through:)

I hope it’s obvious how effective this calculator can be? It can really show how your fund stacks up in comparison to more cost efficient options. It shows you where the holes in your fund exist. For instance, (ALFIX) is fairly cost effective in every respect, other than trading costs.

Unfortunately, that’s where most funds tend to get you, via the hidden trading costs. Based on the transaction costs, its safe to say this fund has a fairly high portfolio turnover, somewhere just below 200% annually.

In conclusion

This entire illustration just reinforces the following truism:

If performance over the longterm is relatively similar for most funds under the same style umbrella (i.e large cap growth funds), its the cost erosion (through high internal fees) that is going to really eat into your bottom line and make the real difference.

This potential cost erosion is plain to see in points #11 through #14.

Once again, don’t chase fund performance, concern yourself with making smart decisions when it comes to the cost effectiveness of the mutual funds you choose to invest in.

This calculator really is such a wonderful tool. If you continue to explore the site, beyond the page I created, you will discover far more than I touched upon in this post…

Tags: Featured, Fee Analyzer, Mutual Fund Cost Calculators, Mutual Funds