Saturday, March 21, 2009

Mutual Fund vs Stock fees

Typically equity mutual fund service fee is 5.5% and stock investment is 0.7%. Other than that, another significant difference between them is that mutual fund normally require a minimum investment of $1,000 whlie stock usually charges a minimum fee of $40.

Mutual FundStocks
Minimum Imposed FeeNone$40
Minimum Investment Amount$1,000None

( Mutual fund fee could range from 1-2%
while stock investment can be as low as 0.05%
but those are not really apple to apple comparison )

So first of all, this $40 minimum could become the first trick in your invesment. $40 fee to a $1,000 investment is 4% alone. In stock investment, the fee is per transaction if buy and sell on different days. So a total of $80 out of $1,000 is 8% !! In stock investment, you must understand MOTS : Minimum Optimized Trading Size especially for speculators in order to really enjoy the low percentage fee as advertised.

In addition, this 0.7% is not the only fee imposed for stock investment. This 0.7% is called Brokerage fee. There are also Clearing fee and Stamp duty. Clearing fee is usually 0.04% and Stamp Duty is $1 for every 1,000. However, when you use 0.7% as the brokerage fee, other fees are small enough to be ignored. This is not the case when your brokerage fee is the lowest like 0.05%, then you effective total fee would easily become 0.18%.

Mutual fund on the other hand is simpler and straight forward. ( they charge much higher fee, ofcourse they should make our life easier )

Meaning when you invest $1,000 into a mutual fund, $55 is paid for the service. Assume there is no market movement and you withdraw immediately, you will get back $945.

Says you buy a $3.08 stock with $5,901.30 ( just slighly more than MOTS), your effective fee would be about 0.84% per transaction or 1.68% in total. But assume if you sell it without any market movement, you will have to find a buyer. So withdrawal is not as automatic as mutual fund. If no one wants to buy your shares when you want to sell it, you will NOT be able to liquidate your invesment !

Lets assume you got into a high volume stock where liquidity is not a problem at all. But you may NOT be able to sell at $3.08. There is always a buy and sell spread. Basically how much you can sell depends on how much people want to buy from you. Anything from $0.005 onward is possible. But in a liquid sell, the sensable price you can sell is most probably $3.06. The 0.02 difference is called the tick size and you can learn a bit about them on this post. Note that when your selling price is $3.06, your effective fee rate becomes 0.85% and not 0.84%, an ignorable difference but nevertheless different.

So to wrap this up, you will get back $5,764.98 if you sell immediately of the stock you just bought ! That is an equivalent of 2.31%

So now you can see how a 0.7% turns into 2.31% in stock investment even when you are senstive about MOTS.

Mutual fund ? Its still at 5.5%, not much trick there. Simple and straight foward.

So it is NO Doubt Stock fee is much lower than Mutual Fund fee but it may NOT be as low as you think it is.


Investment TypePublished FeePut InGet BackEffective Rate
Mutual Fund5.5%$1,000$9455.5%
Stock0.7%$5,901.30$5,764.982.31%


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or read all about mutual fund articles here
or read all about stock articles here

One of the myth not answered yet
due to lack of commenters :
WHY and WHAT we can do about it ?