# Understanding yield, dividend, expense ratio and others related terms in a mutual fund

I have 2 related questions about mutual funds which I bolded.

I was thinking about buying some shares in a mutual fund, such as VanEck International Investors Gold Fund Class A (INIVX). I am confused what exactly some terms means and how they factor into the cost. For example, let's say I buy 100 class A shares in INIVX at \$10 each (for a total market value of \$1,000). INIVX has the following data:

Expense ratio: 1.45 %

Last reported dividend: .37

Yield: 3.66 %

(from Yahoo Finance https://finance.yahoo.com/quote/INIVX?p=INIVX).

OR

Expense ratio: 1.45 %

Last reported dividend: .3718

Yield: 3.79 %

(from Bloomberg (https://www.bloomberg.com/quote/INIVX:US))

I view both yahoo finance and bloomberg as good sources, and while the slight difference in dividend and yield I could understand, I don't understand why yahoo finance didn't mention anything about the front load fee?

Also, back to the example, let's assume that there is in fact a front load fee of 4.5% for this mutual fund, so that my original \$1,000 investment buys me \$955 worth of shares of this fund. Let's also assume that over a year the price of the fund goes up 5% (to \$10.50), and that I now want to cash out. So, I subtract the expense ratio from the yield to get 3.79% - 1.45 % = 2.34% in net yield plus the 5% mutual fund price increase for a total of 7.34% increase, which would put my \$955 at approximately \$1,025 for a net increase in my bank account of 2.5%?

Does the above calculation look correct?

• The only way that I'd even consider investing in a fund with a 5.75% front load and 1.45% expense ration while only yielding 3.8% is if someone put a locked and loaded gun to my daughter's head. – RonJohn Jan 15 at 20:14
• @RonJohn And yet the fund still has net assets of \$726.44 million. I do think that the front load is a bit misleading as if you plan to invest for the long term it lets you recoup some of that initial cost (as @D Stanley mentioned). – AfronPie Jan 15 at 22:16
• Why pay a FL charge + high expenses, when I can buy a low-cost fund from Vanguard or Fidelity? – RonJohn Jan 15 at 22:20
• More importantly, what your point that "the fund still has net assets of \$726.44 million"? – RonJohn Jan 15 at 22:21
• I'd never pay a 4.5% load fee but the only situation where I'd even consider looking at such a position would be if that fund was seriously outperforming the market consistently (think of performance like Peter Lynch's Magellan Fund back in the day). – Bob Baerker Jan 16 at 0:25

There are a number of problems with your analyisis..

You are treating the expense ratio as if it is a sales fee. It is annual fee that all funds charge and is comprised of all fees incurred by the fund and it is deducted from the AUM before calculating the NAV of the fund which is the price that you get if you sell.

The expense ratio is expressed as a percentage of AUM. Both numbers can vary throughout the year and the size of the variance will depend on whether it's an actively manage fund (higher expenses) or an ETF merely duplicating an index such as the SPY, IWM, etc. (lower).

If you invest \$1,000 in a 4.5% front load fund trading at \$10, \$955 is put to work. You own 95.5 shares. If share price rises 5% to \$10.50 in one year, you end up with \$1,002.75 (0.275 %).

Where this goes awry is if there is a dividend/distribution. You have assumed that the distribution is a profit. It is not.

Share price is reduced by the amount of the distribution on the ex-dividend date. The distribution does not provide you with any total return. So if share price is 5% higher after one year and you then receive a 37 cent distribution, you would own 95.5 shares at \$10.13 (worth \$967.41) and you will then be entitled to receive a distribution of \$35.34 (95.5 shares * 37 cts). The sum of these is \$1,002.75 which is the same amount as in the previous calculation where there was no dividend.

• Wow, I really misunderstood the concept of dividends! So, continuing with the example I had gave, then I would have \$1,002.75 (taking into account the price increase and and front load fee). Then, there is a 1.45% expense ratio so that year I would pay .0145(1002.75) = \$14.54 in fees, for a net loss of \$11.79 on my investment? – AfronPie Jan 15 at 23:23
• Dividends are taxed as income if received in a non sheltered account so the general public has taken that to mean that they are actually income, meaning that receiving a dividend results in a profit. No, you would not pay the expense ratio. It is not a direct fee. Expenses are deducted from the AUM (assets under management) and then the NAV is calculated. If the closing price is \$10.50 and you sell, you get \$10.50, assuming that there are no back end fees. – Bob Baerker Jan 16 at 0:21
• If I reinvest the dividends, then will I still have to declare them as profits every year? Also, when you say that the fund's expenses are deducted from the AUM I'm not sure I understand. Does that happen daily? Quarterly? Monthly? Or is it as soon as you put money into the fund? Thanks for your help! – AfronPie Jan 16 at 2:08
• If the account is non sheltered, you must pay taxes on the dividends. Expense ratio fees are not deducted directly from your account. They are taken from the fund's assets (AUM) each day before the NAV is calculated. – Bob Baerker Jan 16 at 2:38
• Ok, thanks @Bob Baerker – AfronPie Jan 16 at 2:48

So this may clear a few things up:

"yield" indicates how much the mutual fund pays out in dividends/capital gains/etc. These have zero net effect from a wealth standpoint, meaning that the value you get in cash is deducted from the price of the fund. If you reinvest dividends automatically then these are of no consequence to you - you'll have more units that are worth less per unit. You can, of course, just keep the cash and/or invest it in something else.

The expense ratio is accounted for automatically in the price of the fund. So if the actual market price goes up 5%, that means that the value of the fund's assets actually went up 6.45% (the expenses are taken out of the assets of the fund)

So using your numbers, if you have \$1,000 to invest in a fund with a 4.5% front-end-load fee, you will get \$955 of the fund. If the market value of that fund goes up 5%, then at the end of the year you'll have `\$955 * 1.05 = \$1003` for a gain of 0.3% (not coincidentally close to the return minus the fee). Note that a front-load fee is only taken out when you buy the fund, so the longer you keep the fund the more time you have to recoup the front-end cost.

• Where does the \$957 come from? `\$1000 * (1 - 5.75%) = \$942.50`. – RonJohn Jan 15 at 20:22
• @RonJohn `1000 / 1.045 = 957` (OP uses a fee of 4.5% in the example). – D Stanley Jan 15 at 20:24
• Why `\$1000 / 1.045` instead of `\$1000 * (1 - 4.5%)`? – RonJohn Jan 15 at 20:28
• @RonJohn The premise was that OP has \$1,000 to invest. The 4.5% fee is added on to the actual invested amount, so \$957 * 1.045 = 1,000. Normally you'd buy X of the fund and pay X*(1+fee), so the math in this case is inverted. Alternatively you could invest \$1,000 and pay \$1,045 for the shares. – D Stanley Jan 15 at 20:31
• Right... understood. – RonJohn Jan 15 at 20:33