The Beer Pong Impulse Buy and Mutual Fund Costs

$30 for Campari?

I was muttering about the high cost of my cocktails when I turned and saw it- the beer pong impulse buy. You’re in the liquor section of the grocery store- why not sell people ping pong balls for beer pong- and put them on the door of the beer freezer?

(They had red solo cups on beer freezer doors, too).

In the fall of 2022, it seems like the cost of everything is increasing, and people are looking for ways to control costs. That includes investment costs.

Mutual funds are a great way to invest in the markets, because funds allow you to diversify your holdings with a small initial investment. One component of successful investing is managing risks. A second factor is the cost of a mutual fund, which has a huge impact on the rate of return you earn.

Nothing is more frustrating than to find out that your earnings have been “eaten up” by fund costs, and mutual fund taxation is also an issue. Use these tips to reduce the cost of your mutual fund.

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Tax Implications of Selling Mutual Funds

For starters, keep in mind that the largest “cost” of owning a mutual fund is annual taxation. Mutual fund taxes may be incurred on three types of transactions:

• Interest income on bond holdings
• Dividend income on stocks
• Capital gain taxes on securities sold for a gain

A quick word on capital gains: Investors are taxed on realized gains. A realized gain means that you have a buy and a sell of a security. If you buy IBM common stock at $30 a share and the stock now trades at $60, you have a $30 per share unrealized gain. The unrealized gain is not taxed.

You may also incur taxes on mutual fund withdrawals- consult with a tax advisor regarding your personal tax situation.

Fund Tax-Deferred Investments First

Generally, “retirement plans” are tax deferred. That means that the investor is not taxed until dollars are withdrawn (presumably for retirement income). Try to maximize your investments in tax deferred investments first- then invest addition dollars in funds that are taxed each year.

Understanding Sales Charges

Many funds have a sales charge (or sales load). This charge compensates an investment advisor for selling the fund and monitoring the investment for a client.

Sales charges can really cause confusion for investors, because the charge can be assessed in many different ways. You can pay the charge on the front-end (when dollars are invested) or on the back-end (when you withdraw dollars).

Take the time of review your fund’s summary prospectus. You can download this document from the fund’s website. Here’s an example for American Fund’s Washington Mutual stock fund- a fund that’s been around for years. The prospectus will compare the total sales charges you’ll pay, based on a variety of scenarios.

If, for example, you plan on holding the fund for 7 years or more, you may find that the back-end load decreases to nearly zero. This is intentional: The sales charge is set up to encourage the investor to hold the mutual fund over the long term.

Reviewing Annual Expenses

As the name implies, annual expenses are charged to manage the mutual fund each year. This expense pays for the analysts, accountants, lawyers and other admin staff.

This brings up another area of confusion. Many funds are “no-load’ mutual funds that do not require a sales charge. However, nearly all mutual funds charge an annual expense, and the amount of that expense can vary greatly.

The annual expense lasts forever- as long as you own the fund. So, the dollar amount of that expense has a huge impact on your rate of return over the life of the fund. Again, check the summary prospectus for the annual expense amount- and how that cost compares with similar funds.

Using Breakpoints to Lower Costs

A breakpoint is a quantity discount, and you earn a breakpoint by investing in a particular fund family. American Funds, for example, is a fund family that manages dozens of mutual funds. If you choose to diversify your holdings by using a variety of American Fund products, you will receive a discounted sales charge.

Using Morningstar Data

Finally, consider using Morningstar for your mutual fund research. This site has great information on all aspects of mutual funds- including the impact of taxes on the rate of return of your fund.

Use these tips to make smart decision about the cost of your fund. These decisions will help you minimize the cost of your mutual fund, and those decisions can have a massive impact on your earnings over time.

Consult with a financial advisor regarding all investment decisions.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Email: ken@stltest.net

Website: https://www.accountingaccidentally.com/