Going It Alone with Mutual Funds: No-Transaction Fee Networks

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Going It Alone with Mutual Funds: No-Transaction Fee Networks

When it comes to buying mutual funds, do-it-yourselfers who hate paperwork but want a lot of choices shouldn't despair: no-transaction fee networks, also known as "supermarkets," are a popular solution. Charles Schwab pioneered this idea in 1992 when it launched the Schwab OneSource program. If you invest through OneSource, you can choose from thousands of funds offered by dozens of fund families—and there's no direct cost to you. So you could buy one fund from Janus, another from Royce, yet another from PIMCO, and one from Tweedy, Browne and receive all of your information about performance, taxes, etc., on one consolidated statement.

There are a number of fund supermarkets today, and more and more fund families are getting into the act: several have supermarkets that include funds outside of those families.

There are some cons to go with the pros

What could the drawbacks here possibly be? Surprisingly, one drawback is cost. While it is true that fund supermarkets do not charge you when you invest in a fund through their programs, they charge the fund companies to be included in their programs. That charge ranges from 0.25% to 0.40% of assets per year. As any student of economics knows, that fee acts a whole lot like a tax and it's passed right along to shareholders—that's right, to you—as part of a fund's expense ratio, the fee the fund charges you each year for managing your money. The real kicker is that shareholders are paying these fees whether they buy the funds through the fund supermarket or directly from the fund family.

Some observers in the mutual fund industry also suggest that fund supermarkets encourage rapid trading among funds. Most supermarkets offer online trading, and with so many funds from so many families investing in so many different things to choose from, the temptation is great. But trading too much can hurt your portfolio's overall performance.