Should You Pay A Transaction Fee to Buy a Fund?

September 18, 2012

Thinking about buying a mutual fund that carries a transaction fee at your broker? Make sure you consider how much you are planning to invest in a fund before you pay a fee to buy it.

Broker commissions often seem pretty slight (our “Understanding Broker Transaction Fees” shows how much it costs to buy and sell transaction-fee funds at eight common brokers), but they have a significant impact on smaller positions.

If your account is at Fidelity, for example, a transaction-fee fund may cost as much as $75. If you invest $50,000, this fee represents only 0.15% of your position. But if you invest just $2,500 – the minimum investment for many mutual funds – the transaction fee represents 3% of your investment. We think that’s a steep price to pay for just one position.

In our client accounts, most of the funds we use are no transaction-fee (NTF). When we buy transaction-fee funds, we try to keep transaction fees under 0.5% of the position.

The table below can help you arrive at your own rule-of-thumb. The total cost for buying and selling a transaction fee fund is called a “round-trip.”

brokerfee

If your broker’s transaction fee is too steep, consider investing in an NTF (no transaction fee) fund instead or an exchange traded fund, or ETF.

Broker commissions for ETFs are fairly inexpensive, usually $10 or less. Since you are charged a commission when you buy and when you sell an ETF, your round-trip costs are roughly $20 so as the table indicates, as long as you’re investing $2,000 or more in an ETF, your trading costs should be less than 1% of your investment.

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