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Commentary

Mutual Fund Urban Myths

The notions that mutual have 140 to 200 basis points in hidden costs are largely fiction.

Like all areas of human endeavor, the fund industry is prone to its share of urban myths— stories that simply aren’t true but which contain enough of a basis in reality to make them seem plausible. These untruths get retold with such passion and frequency that people eventually accept them as gospel, and they become part of the industry’s shared beliefs.

One urban myth circulating among investors is that mutual funds have hidden fees of 140 to 200 basis points that are omitted from expense ratios. When these hidden fees are added to a fund’s stated expense ratio, they presumably bring overall annual fund expenses to something in the 2.5% to 3% range. When the additional toll of taxation is taken into account, the total cost of fund ownership is supposedly close to 5% for some funds. It’s enough to send shivers down your spine.

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