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Chapter 9. Mutual Funds: Carrying the Load > Out of Sight and Out of Mind

Out of Sight and Out of Mind

Chapter 8, “Mutual Funds: Performance,” illustrates the importance of expenses to a mutual fund investor's return. Indeed, without expenses, mutual funds outperform the market. Yet, after expenses, mutual funds underperform the market. Expenses and taxes are critical components to the mutual fund investor's total return and wealth. Do investors make decisions based on expense information?

This chapter has shown that mutual fund costs and expenses are complicated and can be difficult to ascertain. Can the average mutual fund investor obtain enough correct information to make a decision? How much do investors really care about mutual fund expenses? Indeed, many mutual fund investors don't care. In a survey of 2,000 mutual funds investors, over 80% admitted that they did not know what their largest mutual fund holding was charging in expenses.[22] Nearly 60% said that they didn't even know when they originally invested in the fund. Even when investors do know the expenses associated with their funds, they seem to have a perverse idea of the relationship between expenses and fund performance. Over 84% thought that a fund with higher than average expenses would earn a return that was average or above average. Investors think that higher expenses lead to higher returns. This is not the relationship identified in Chapter 8.


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