Mutual funds do serve a purpose. Many investors may not have enough time, knowledge or courage to invest in individual stocks. Let face it, its a scary time to be investing in the stock market. Even experienced investors feel the stress and frustration in a market that has become volatile, unstable, and uncertain. Some investors feel safer in mutual funds knowing that a professional manager is overseeing their investment. This professional management does not come cheaply though, and many mutual funds do not even match the performance of their respective benchmarks.

The fees that mutual funds charge can be significant and create a perpetual drag on portfolio performance. Fees typically include: administration fees, redemption fees, 12b-1 fees, management fees, loads, and sales charges. Mutual fund administrators have become very creative in hiding fees in mutual funds.

Fees on mutual funds can vary considerably, from 1% to 3% or more, but for our example, lets assume that the fees we are being charged are 1.51% management fees (the average for equity funds in 2006) and 0.5% 12b-1 fees, for a total of 2.01%. These are typical figures. The average portfolio in the U.S. right now is about $50,000 and the stock market has historically averaged about 10% per year. Using these figures, lets see the effect on our portfolio.

Portfolio: $50,000
Return: 10%
Fees: 2.01%
Term: 25 years

Ending balance without fees: $541,735
Ending balance with fees: $341,632

Lost growth due to fees: $200,103

Thats quite a haircut anyway you look at it.