Mutual fund investment costs declined in 2011, according to an annual report from the Investment Company Institute. Find out why.
A continuing shift by investors to index mutual funds has helped drive down investment costs in 2011, according to a recent annual report by the Investment Company Institute, or ICI.
A decline in the expense ratios of individual funds also contributed to lower investment costs, said the ICI, a national organization of investment companies managing a total of $13.4 trillion in assets for more than 90 million shareholders.
Investments costs were down across several classes of long-term mutual funds, including equity, bond and hybrid funds, according to the annual report. The average expense ratio for equity fund investors was .79 percent, down .04 percent from 2010, said the ICI. On an asset-weighted basis, average expense ratios for equity funds have dropped 20 percent over the last 20 years.
Multiple factors influence fund expense ratios, including fund growth coupled with economies of scale, competition between mutual fund providers and investors gravitating to funds with lower investment costs, Sean Collins, senior director of Industry and Financial Analysis for ICI, said in a statement.
Demand for index mutual funds, which generally have lower investment costs than actively managed funds, continued to grow in 2011, according to the ICI. Assets in index mutual funds grew from $170 billion in 1997 to $1.1 trillion at the end of 2011.
The asset-weighted average expense ratio for bond funds fell to .62 percent, a drop of 0.2 percent from 2011. Strong inflows and returns boosted assets in these funds, allowing investment costs to be spread over more assets, said the ICI, which also attributes lower bond fund expense ratios to federal monetary policy and the expectation interest rates will remain at historic lows through 2014.
The decline in investments costs extended to money market funds, which experienced a drop of .03 percent in average expense rations in 2011, following a drop of .09 percent in 2010. ICI attributes the drop to a “significant” increase in the number of funds waiving expenses to ensure returns remained positive in the current low interest environment.
The primary mutual fund investment costs are fund expenses, paid from fund assets throughout the year, and sales load, paid at the time of purchase or when shares are redeemed. According to the ICI, front-end load fees have declined from 4 percent to 1 percent over the past 20 years.
“This in part reflects flows into 401(k) plans, which are often invested in funds that waive load fees on purchases made through these plans,” stated the ICI. Combined assets in U.S. mutual funds grew by 0.5 percent to $61.6 billion in March. As investment costs go down, investment goes up.