According to the Investment Company Institute (ICI) study, Total Shareholder Cost of Mutual Funds: An Update, the total cost of equity fund investing dropped about 5% between 1998 and 2001 and by a whopping 43% cumulatively since 1980.
The cost of investing in bond and money market funds also continued to head south by 17% and 14%, respectively between 1998 and 2001 and by 41% and 35%, respectively since 1980, the ICI said.
$7 Cost Savings in Equity Funds
Based on a $10,000 account, the study estimated that the total shareholder cost for all equity funds declined from $135 in 1998 to $128 in 2001, a decrease of 5%. Since 1980, the cost to shareholders of investing in equity funds has declined 43%.
The study also estimated that the total cost to shareholders of bond funds declined 17% between 1998 and 2001 to $90 from $108, based on a $10,000 account. Since 1980, the total cost to shareholders of investing in bond funds has declined 41%.
Money market fund costs dropped 14% last year to $36 per $10,000 invested from $42 in 1998. Since 1980, the cost to shareholders of investing in money market funds has declined 35%.
Effects of Distribution Costs
The ICI study found that dropping total equity fund shareholder cost reflected a still dropping distribution cost, which is the component of total cost that primarily represents compensation to sales professionals for advice and service.
Distribution cost for investors in equity funds fell 23% between 1998 and 2001 and overall is down 73% since 1980.
The recent decline as well as the cumulative decline resulted from an increase in sales of no-load funds, which have minimal distribution costs; and an increased proportion of load fund sales through 401(k) plans, wrap accounts, and IRA rollovers of 401(k) balances in which loads are reduced or waived, the ICI said.
The decline in total shareholder cost between 1998 and 2001 growing out of the drop in distribution cost would have been even larger but for a shift in investors’ preferences toward aggressive growth and international/global funds over the three-year period. These funds have higher operating expense ratios than other types of equity funds, according to the ICI.
Total shareholder cost represents the cost that an investor would expect to incur in purchasing and holding mutual fund shares.
It accounts for all major fees, expenses, and sales charges relevant to decisionmaking, and is based upon the same considerations underlying the fee information required by the US Securities and Exchange Commission in every mutual fund prospectus.
The fees and expenses included in total shareholder cost consist of fund operating expenses, 12b-1 fees, and sales loads. In contrast, most other measures used to analyze mutual fund ownership cost do not account for sales loads.
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