Mutual Funds.- Managers take over 50% of your money after 40 years. OK?

Question

I have long noted that mutual fund advetisements show the "effect of charges"(the weasel name for the manager's cut), after 1,3,5 & 10 years but never, beyond that. I also noted that not only does the sum take by the manager increases with time, but also the % age. So I decided to calculate how much they take in the longer term. After all, the government keeps extorting us to save for our old age. My findings were as follows:

If a mutual fund grow at an average rate of 6% pa and has a front load of,say, 5%, and annual charges(TER) 2% the manager's cut (effect of charges)is:
After 1yr 7%
After 5yrs 14%
After 10yrs 22%
After 20yrs 36%
After 40yrs 57%

The load & annual charges assumed in this example are common in UK. In the US they are lower, but do let me assure you that the results are only a little less shocking. Is it any wonder they never show us the figures after 10 years? Still want to invest in mutual funds? Well, there is a fool born every day,as they say.

Answer 1

There was a relatively famous study about how around 75% of the actively managed mutual funds underperform the corresponding index after taking into account the management fees. I'm not familiar with the UK area, but in the US, I'm more for just investing in the indices with some of those ultra low cost index funds. Or just an ETF as they have comparable costs.

It's a big industry, though, so of course, they want to charge as much as they can get away with.

Answer 2

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Answer 3

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Answer 4

Your numbers are way off.

The front load is a one time carge. Many funds are no-load funds.

The annual fee is more like 0.50% -- not 2%.

Yes, mutual funds usually underperform the index they match because of transaction costs -- but for most individuals the benefits of diversification that a mutual fund offers more than makes up for this loss. Most people cannot afford to have a well diversified portfolio on their own.

Answer 5

Yes I still want to invest in mutual funds. What you say is true about many mutual funds, but we do have some low fee accounts here in the U.S. I have money in the Vanguard Total Stock Market Index Fund (Admiral) with a 0.09% annual fee. I am less knowledgeable with U.K. funds, but there is a MoneyBuilder UK Index Fund at Fidelity with a 0.3% annual fee. Both funds have no initial fee. (It has been pointed out, however, that Fidelitity's fee has been higher in the past, and its current fee may be a short lived teaser rate.)
I will say that the U.K. does seem to have overall higher annual fees than the U.S.

Answer 6

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