Mutual funds with high expenses can put a serious hurt on your
investment returns . But
how do you determine just how bad the damage is? Some web sites
include estimated annual fees and compare a fund's
costs to the average for the fund category, but
that's just the beginning. The bottom line is how
much more money would you have, if you didn't have
to pay those darned fees? If you're trying to decide
between several funds with similar investment philosophies, comparing
your ending balance after several years, taking into account fund
return and expenses, can help. You can use built-in Excel functions
to calculate the potential cost of ownership and your bottom line
return.

To calculate the true cost of mutual fund expenses, you need only a
few items of data, shown in highlighted cells at the top of the
spreadsheet in . You must enter the value
of your initial investment and the number of years you expect to own
the fund. Whether you're trying to decide which fund
to buy or looking to replace a fund you already own, enter the number
of dollars that you're ready to invest as the
initial investment (cell B2 in the example) to obtain the most
accurate picture of costs and their effect. If your mutual funds are
for retirement, you might hold them for decades. If you invest in
funds to pay for your kids' college education, your
timeframe might be five to ten years.

The expected annualized return in cell B4 is how much you expect the
fund value to increase on average for each year that you own the
fund. A higher annual return makes your investment grow, which in
turn increases your fund costs. What number should you use? It
depends on how conservative you are. Because very few funds beat the
market over the long term, you can use a long-term average return for
a comparable index, such as the ten-year return for the Russell
Mid-cap index for a fund that invests in mid-cap stocks. However, if
you think a fund will beat the market, because it has for a long time
or you just have an inkling, you can use the fund's
long-term annual return, such as the ten-year return or, even better,
its annualized return since its inception, which is from the first
day the fund existed. The best place to find these numbers is at the
fund web site, which typically includes annual returns for the fund
for one year, three years, five years, ten years, and since
inception, if that's longer than ten years. Web
sites often show returns for comparable indexes or fund categories
for similar time periods.

You can type in the values for the four types of mutual fund expenses
in cells B7 through B10 or capture fund expenses automatically . The expenses fall into three
categories: annual expenses, up-front expenses, and expenses you pay
when you sell. If a fund charges a fee with a name you
don't recognize, find out when you pay the fee. If
it's an annual expense, add it to the expense ratio.
If you pay it up front or when you sell, add it to the front-end
sales load number or the deferred sales load percentage,
respectively.