Cost of mutual funds lowest in 25 years

The Investment Company Institute reports that the cost of owning mutual fund shares fell again last year, to the lowest levels in more than 25 years.

According to ICI Senior Economist Sean Collins, the decline in mutual fund fees was driven primarily by continued investor migration to lower-cost funds and by cuts in expense ratios by funds in an intensely competitive market environment.

Collins' study, Fees And Expenses of Mutual Funds, 2005, found that last year's decline in mutual fund fees and expenses continues a trend since 1980. This decline has been most pronounced among stock and bond funds
where average fees and expenses have dropped by more than 50 percent. The average fees and expenses for money market funds have fallen by about 25 percent in the same period. In 2005, stock fund investors on average paid 113 basis points in fees and expenses, a 4 points drop from 2004. Bond funds fell to 90 basis points in 2005, a decline of 2 points.

The total cost of investing in stock funds fell in 2005 for the third consecutive year.

Other highlights of the study include:

• The vast majority of investors' assets are in low-cost funds: of the total assets held in stock funds, 90 percent are in funds with below-average expense ratios.
• Investors shop for low-cost funds: the average expense ratio that shareholders paid to invest in stock funds was 0.91 percent in 2005, considerably less than the average expense ratio of 1.53 percent for all stock funds offered in the marketplace.
• New purchases of fund shares are going to low cost funds. Of the $136 billion in net new cash flow to stock funds during 2005, 30 percent went to funds with an expense ratio of less than 50 basis points.
• Of the 4 basis point decline in the average stock fund expense ratio, a drop in expense ratios of individual funds accounted for 1.75 basis points and the increased market share of lower-cost funds accounted for 2.25 basis points.