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Costs of Investing

A fourth issue is the costs and fees of mutual funds. Regardless of the gross returns earned by a fund, investors ultimately get to keep only the net return. If an investor pays a load charge of five percent, that amount comes off the top of the investment, leaving only 95 percent of the investor's funds actually invested in shares.

Operating expenses are deducted before cash flows are paid to shareholders. Obviously, the higher the operating fees, the lower the net returns. As we saw earlier, many mutual funds have different classes of shares, the so-called Class A, B, and C shares, with different expense ratios. If you buy the Class B or Class C shares, you pay substantially more with the expense ratio than you would with the Class A shares. Over time, this makes a substantial difference in your cumulative net returns.


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