Making the Most of Morningstar: Determining the Cost of Your Mutual Funds

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The Morningstar User’s Guide is a series of articles discussing how to make the best use of the tools, research and analysis available at Morningstar.com.

As we saw in the last article covering Morningstar’s Portfolio Manager, the tool provides some basic information about our investments, including the fund name, price, market value and the Morningstar Rating. But this just scratches the surface. Over the next few articles, we will look at much more detailed information Morningstar has to offer, starting with the cost of the funds in your portfolio. I picked fund costs to begin with because I think it is one of the top three most important factors in picking a fund (asset class and length of time the fund manager has been at the helm, being the other two). So, to begin with, we need to select the “My View” tab in the Portfolio Manger, which looks like this:

msmyview.jpg

Once in My View, select the Customize My View menu item near the top right of your portfolio:

mscustomizemyview.jpg

This will bring you to a dizzying array of options. We will summarize those options later in this series, but for now, we want to select just one item from the list in the left-hand box called Expense Ratio (%). You can either scroll down the alphabetized box or search by name. Highlight the Expense Ratio (%) selection, and you’ll see an important description of the item appear in the bottom left box:

expenseratio.jpg

It is important to read the description of each item you plan to use, as they contain important information about the item. In the case of the Expense Ratio (%), the description notes that not all fund expenses are included in the ratio:

The annual expense ratio, taken from the fund’s annual report, expresses the percentage of assets deducted in the last fiscal year for fund expenses. This figure includes 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund’s average net assets, is accrued on a daily basis. If the fund’s assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as the net assets of the fund grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may opt to waive all or a portion of the expenses that make up their overall expense ratio.

Due to the unique characteristics of fund of funds we display the expense ratio from the prospectus instead of the annual report. These values take into account the underlying expenses of the holdings.

You can read more about a fund’s expenses and how to determine a fund’s transaction fees in How to Find The Hidden Cost of Mutual Funds. Include the Expense Ratio (%) item to My View by highlighting it and clicking the Add button. The click the Save button, which will display your portfolio with the added item. My expense ratio looks like this:

expratioportfolio.jpg

The nice thing about this information is that it provides a weighted average cost of all your funds. My goal is to keep my total cost under .50% and the cost of any individual fund under 1%. I do have one fund just over 1%, but the amount in the fund is small and it was the only fund available to me in my 401(k) that covered that asset class (foreign bonds).

So if you want to know the total cost of your funds (and you should want to know the total cost of your funds), you can use this free tool from Morningstar. If one or more of your funds are costing you more than they should, maybe it’s time to find a replacement fund.

Return to the Morningstar User Guide table of contents.

Published or Updated: April 26, 2011
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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