Operating Expenses

Operating expenses finance the fund’s costs and compensate management teams for their provided services. They are expressed as an annual percentage of all assets under management. Operating expenses are deducted from your investment once a year, every year that you’re invested in the mutual fund. You should never receive a direct bill requesting payment. These expenses come in 3 divisions: Advisory Fees, Operational Fees, and Communications Fees.

The Advisory Fees are directed to the actual management team and staff. This compensates them for their annual salaries and bonuses. This section typically makes up the bulk of the operating expenses that are listed every single year.

The next bulk pays for Operational Fees. These prepay or reimburse expenses for travel, researching investments directly, purchasing research from others, and analysis related expenses. If spent on proper research, these expenses ensure that your investment improves in value over the long term.

The final division of operating expenses pays for Communications with shareholders. It is also named “Shareholder Servicing”. This category pays for expenses delivering information to shareholders and maintaining relations. They also pay to create and maintain records, print multiple copies of documentation, and mail them to your doorstep. They also pay for that website you may be able to log onto, and the phones the communication team answers when you call.

Since these expenses operate indefinitely into the future, you should definitely compare fees for multiple funds in the same category. Since these fees are charged against assets under management, they essentially cancel out a portion of your returns. This reduces compounding of your investment which creates a drag on long term performance. A higher expense has worse impact on your long term returns.