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Mutual Fund Investing Costs Drop: ICI

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Oct. 8, 2002 — The cost to shareholders of investing mutual funds continued to fall between 1998 and 2001.

According to research from the Investment Company Institute, the total cost of investing in equity mutual funds decreased about 5% between 1998 and 2001, and by 43% since 1980.

The cost of investing in bond and money-market funds also continued to fall, the ICI found. The costs of investing in bond funds fell by 17% from 1998 to 2001, and by 41% since 1980, while the costs of investing in money funds fell by 14% and 35% in those respective periods.

The study found that the decline in total shareholder cost in equity funds largely reflected a continuation of the downward trend in distribution cost, which is the component of total cost that primarily represents compensation to sales professionals for advice and service.

ICI found that the distribution cost for investors in equity funds fell 23% between 1998 and 2001, and is down 73% overall 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 report also explained that the decline in total shareholder cost between 1998 and 2001 associated with the decrease in distribution cost would have been even larger save for a shift in investors’ preference 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.

ICI said the research is based on total shareholder cost, which represents what an investor would expect to pay for buying and holding shares in mutual funds, accounting for all major fees, expenses and sales charges.