MUTUAL FUNDS: COST TO BUY VS. COST TO OWN

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

There's an old song with a memorable saying in its refrain: "The best things in life are free." The lyrics refer to the great outdoors -- the beauty of the stars, a hike up a mountain or the sound of the surf.

Nature's gifts are free to enjoy, but when it comes to man-made institutions, there is a different old saying that fits the bill: "There's no such thing as a free lunch."

That adage applies to no-load mutual funds. A lot of people select this type of investment believing that "no load" means "no cost." If you're one of those investors, you may want to compare the cost to buy vs. the cost to own.

Sales fees -- the cost to buy -- are a one-time expense. Annual expenses -- the cost to own -- are ongoing and take the biggest bite over the long run.

Every mutual fund has annual expenses. The most obvious are fees paid to the fund's investment adviser, as well as marketing, advertising and distribution charges. Other fees include normal operating costs, such as office space, staff and equipment. Such expenses are not charged directly to a shareholder's account, but are deducted from the fund's assets. This means that there is less money for shareholder returns. Lower expenses result in more money for shareholders over the long term.

Although no-load funds may not charge an up-front fee, their annual expenses can have a significant negative impact on your return, so it's important to consider carefully the annual expenses of any type of fund. You can find information about a fund's expenses in the condensed financial information of the prospectus or in the fund's annual report. It's generally described as the "ratio of expense to average net assets" and is listed for current and past years.

The average industry expense ratio for a growth fund is 1.46 percent as calculated by CDA/Wiesenberger. The average for a growth-and-income fund is 1.42 percent, and for taxable fixed-income funds, it is 1.19 percent. Statistics from Lipper Analytical Services show the average no-load fund has an expense ratio of 1.32 percent.

If you are considering a fund with a 2 percent expense ratio, which is quite common, look for that added expense to eat into your profits. For example, compare two funds. Fund A has a 0.05 percent annual expense, and Fund B's annual expense is 2 percent. Each earns a hypothetical 15 percent average compound total return over a five-year period. For a $10,000 investment, Fund A's expenses would be $365 over the period, but Fund B's would be $1,460.

Annual expenses are an annual "deduction" from your fund's performance. If a no-load mutual fund has a higher expense ratio than a load fund, you may not be saving money over the long run. Over meaningful periods of time, the advantage of low annual expenses will easily overcome the up-front sales charge, even before considering the performance of the fund.

Whether you are considering a mutual fund or already own an account, ask the fund to run an expense study for your examination so you can see what the cost to own is over the long term, compared to the cost to buy. Because mutual funds are long-term investments, you should focus on the real issue: performance over time.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.