Mutual fund companies have spent the last three years losing your money. Now, they could end up charging you more. Higher fees are just one of the treats that fund investors can look forward to in the new year. Facing business pressures from a sour market, fund companies have spent the past year trying to cut costs, stay profitable and still sell funds. And this bear-market austerity could mean higher fees, more load funds, additional fund mergers and closures, and few new funds in 2003. Sadly, these trends are not your friends.
Broadly speaking, the less money in a mutual fund, the higher the fees. And with assets dwindling in stock funds this year thanks to redemptions and market losses, expenses could creep higher. The average U.S. stock fund has fallen another 21% in 2002. And through the end of October, investors had pulled $26.5 billion in cash from stock funds. Dwindling assets can force a fund's expense ratio higher in a couple of ways. First, remaining shareholders bear a greater share of the costs of operating the fund, which would include fees for regulatory filings and legal and accounting work. Then the management fee, which is the other main component of a fund's expense ratio, could also move up. Some funds have thresholds in the management fees they charge, where those expenses inch higher as assets decline. Now, if you're invested in a multibillion-dollar fund, you probably won't see a big uptick in expenses. But shareholders in funds with $100 million or less, where fixed costs start taking a nice chunk of assets, could see a noticeable difference.