This week's answer comes from:

Cathy Pareto

Cathy Pareto is a Financial Advisor at Singer Xenos Wealth Management, a fee-based investment advisory firm with over $350 million assets under management.  Located in Coral Gables, Florida, she specializes in wealth management, investment planning, asset protection planning for physicians, retirement and estate planning. Cathy has a BBA in Finance from Florida International University and is in the final stages of completing the College for Financial Planning curriculum in preparation for the Certified Financial Planner (CFP) Certification Examination. She can be reached via email at Cathy@SingerXenos.com or via the www.SingerXenos.com website.

What's included in fund expenses?

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What's included in fund expenses?

from Ron

Q: Do the annual expenses quoted in mutual fund prospectuses also include trading expenses, such as commissions? If not, how do I find out  what these additional expenses are? A high turnover fund might have significantly higher net costs.

A: Thanks for visiting MFI!

The annual expenses or total operating expenses of mutual funds usually include all fees and expenses (management fee, 12b-1 fee and other expenses). What obviously is not included in the expense ratio if whatever load (if any) you've paid, or the transaction fee at the custodian where you keep the account.

You are absolutely correct to assume that a fund with high turnover has far more trading costs (and taxes) than a similar fund with low turnover. The unfortunate reality, however, is that it's virtually impossible to breakdown those costs within the fund. But, that's the risk that investors incur by hiring a mutual fund manager.

You don't have to be subject to the whims of a manger. There are alternatives out there.

For example, one the best things about buying an index fund is that you eliminate those types of issues. There is no manager picking stocks or arbitrarily moving in and out of positions. What you get is a passive strategy at a low cost, with low turnover and low taxes that delivers what the market made.

There are many index funds to choose from that are not limited to the S&P 500. Check out the offering at Vanguard. You can piece together a pretty decent, low cost strategy with several of their funds.

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.