Common Mistake #28: Ignoring Expense Ratios and Sales Loads in Mutual Funds

Mutual funds often present themselves as packaged solutions - diversified, professionally managed, and easy to own. What's less visible is how much they cost to hold. According to long-running industry research and fee data compiled by Morningstar and the Investment Company Institute, a fund's ongoing expense ratio is a meaningful driver of future net returns because those costs are deducted every year and compound against investor outcomes. Morningstar's analysis shows that lower-cost funds have historically been more likely to deliver stronger future performance relative to peers, and the average expenses tracked by ICI highlight how persistent fees shape long-term results.

This article explains why ignoring expense ratios and sales loads in mutual funds is a common investor mistake, how these costs quietly erode outcomes over time, and why the damage often goes unnoticed until decades have passed.

Key takeaways

• Expense ratios reduce returns annually, regardless of market conditions.
• Sales loads add friction before or after returns even begin.
• Small fee differences compound into large outcome gaps over time.
• Many fund costs are poorly understood or overlooked entirely.
• Net returns matter more than gross performance.

Why mutual fund fees often feel abstract

Mutual fund fees rarely show up as explicit charges. Expense ratios are embedded. Sales loads may be deducted before an investor ever sees the money invested. Statements focus on balances and performance, not on what was quietly skimmed away.

As long as markets rise, the drag isn't obvious. Accounts grow. Returns look positive. Nothing signals a problem.

Up to this point, ignoring fees feels harmless.

That's exactly why this mistake is so persistent.

Here's the cost most investors don't see clearly

Expense ratios aren't one-time payments. They are ongoing claims on portfolio returns.

A difference of 0.75% or 1% per year may sound trivial. Over decades, it compounds relentlessly - reducing not just current returns, but the base on which all future growth builds.

Sales loads add another layer. Front-end loads reduce the amount invested from day one. Back-end loads penalize exits later. Either way, returns must overcome an extra hurdle before benefiting the investor.

So what? Two investors can experience identical markets and identical holdings - and still end up far apart solely because of costs.

This is where "small" becomes structural.

This is where fees quietly override performance

Hypothetical example: Imagine two investors holding similar mutual funds with similar market exposure. One fund charges a low annual expense ratio with no sales load. The other charges a higher expense ratio and includes a load.

Both funds perform similarly before fees. After fees, one compounds on a larger base year after year. The other consistently gives up a slice of growth.

No bad decisions were made. No markets were mistimed. Yet one outcome steadily lags the other.

This is how fees overpower skill - not through drama, but through persistence.

Why sales loads make the problem worse

Sales loads often feel like a past issue - something paid once and forgotten. In reality, they permanently reduce the capital that gets to compound.

A front-end load lowers the starting point. A back-end load discourages flexibility later. Both add friction without improving market exposure.

Because loads don't appear on performance charts, their impact is easy to underestimate. But compounding works on what's invested - not what was intended to be invested.

This is where structure quietly dictates results.

Why does this mistake persist even among engaged investors

Mutual funds make costs hard to see. Fees are spread across different share classes, buried in changing expense ratios, and explained in dense fine print. Side-by-side comparisons are rarely simple. It's also worth noting that some mutual funds are structured with no sales loads or are offered through lower-cost institutional share classes, but these distinctions are not always obvious without deliberate review.

As a result, investors gravitate toward what's easier to grasp - past performance, a familiar manager, or a recognizable brand - while overlooking costs that quietly accumulate in the background.

The problem isn't intelligence. It's where attention goes.

Fees don't tell stories. They just compound.

The reframe that brings fees into focus

Investors who avoid this mistake often adopt a simple reframe:

Fees are a guaranteed reduction in return, not a hypothetical one.

This reframing shifts focus from what a fund might do to what it will cost.

Supporting considerations - such as comparing expense ratios across similar funds or understanding whether loads apply - exist to clarify trade-offs, not to dictate a single approach.

The goal isn't perfection. It's avoiding unnecessary drag.

When higher mutual fund fees may still exist

Some mutual funds charge higher fees due to structure, distribution models, or specialized mandates. In employer plans or legacy accounts, choices may be limited.

The distinction, consistent with the rest of this series, is awareness.

Ignoring expense ratios and loads becomes a mistake when costs are accepted by default - not when they are understood and evaluated in context.

Costs don't need to be minimal. They need to be intentional.