TAILIEUCHUNG - Fees and Expenses of Mutual Funds, 2006

Hedge Funds have grown quickly over the past ten years, and are important part of the financial landscape. They are difficult to define as entities, because the line between what hedge funds do that other institutions do not is blurred – proprietary traders in investment banks, private equity funds, and fund managers all use extensive leverage and derivatives to trade markets or to shift risks. The definition of a hedge fund used here is as follows: lightly-regulated managers of private capital that use an active investment approach to play arbitrage opportunities that arise when mis-pricing of financial instruments. | INVESTMENT COMPANY INSTITUTE Research fundamentals 1401 H Street NW Suite 1200 Washington DC 20005 202 326-5800 June 2007 Vol. 16 No. 2 Fees and Expenses of Mutual Funds 2006 Key Findings Mutual fund fees and expenses fell to their lowest levels in more than a quarter century in 2006. Stock fund investors on average paid 107 basis points in fees and expenses a drop of 4 basis points from 2005. Fees and expenses on bond funds fell 5 basis points while those on money market funds fell 2 basis points. The drop in fees and expenses continued a trend observed since the early 1980s. The fees and expenses paid by stock and bond fund investors have dropped by more than 50 percent since 1980. The decline in fees and expenses in 2006 on stock funds in part reflected lower load fees paid by investors. In 2006 the average maximum sales load on stock funds offered to investors was percent but the average sales loads investors actually paid was just percent owing to load fee discounts on large purchases and fee waivers on purchases through 401 k plans. The decline in stock fund fees and expenses also reflected lower expense ratios. The average expense ratio on stock funds fell 2 basis points in 2006. Over the past five years the average expense ratio of stock funds has dropped 11 basis points as investors shifted their purchases toward lower-cost funds and as expense ratios fell on stock funds they already owned. Mutual Fund Fees and Expenses Continue Downward Trend in 2006 The average fees and expenses that investors paid on mutual funds fell in 2006 to their lowest levels in more than 25 years Figure 1 . Investors paid 107 basis points on average to invest in stock funds a 4 basis-point decline from 2005. Average fees and expenses on bond funds dropped 5 basis points to 83 basis points and those on money market funds dropped 2 basis points to 40 basis points Figure 2 . The reduction in mutual fund fees and expenses in 2006 continued a downward trend that

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