Get a Grip on Mutual Fund Fees
By Kristi Vaughan
Are fees eating away at your mutual fund investments? Understanding what you are being charged and when you are paying it can help you become a wiser investor.
Just as there are different investment strategies and fund managers, so too are there different ways of paying the management, transaction and service costs of mutual funds. And, as you consider investing in mutual funds it is important to note that these costs are incurred whether the fund is increasing in value or declining.
Load and no-load funds
To the new investor the most obvious differentiation in fees is between load and no load funds. A load is the sales charge that is, or is not, charged to an investor at the time of purchase or redemption.
Typically, load funds are those that use a third party, such as an investment advisor or broker, for sales. No-load funds more commonly are purchased directly through the mutual fund company.
But there is more to the cost of investing in funds than just sales charges.
Shareholder fees and operating expenses
There are two broad categories of mutual fund expenses: transaction costs and operating expenses. These fees are listed in a fund’s prospectus.
Transaction costs often are paid as “shareholder fees” and come directly from the investor while operating expenses are paid from fund assets. In an effort to attract investors, mutual fund companies will try to keep costs down and establish shareholder fees structures that benefit different types of investors.
Shareholder fees
Shareholder fees include sales loads or charges on purchases and redemptions. When the sales charge is on the purchase, it is considered a front-end sales load. When it is on the redemption, it is called a back-end load. Back-end loads often decline over time so that after a certain number of years there is no charge at all.
In no-load funds shareholders fees can appear as redemption fees, purchase fees, exchange fees and account fees. The redemption and purchase fees differ from loads and sales charges primarily because they are paid to the fund itself rather than a broker. The exchange fee is charged by some funds when transfers are made between funds in the same fund group. The account fee can be a maintenance fee charged by some funds when balances are below a certain value.
Operating expenses
As the name implies, operating expenses are those costs associated with managing the fund. These include management fees, 12b-1 fees and other costs.
Management fees are money paid to the funds investment manager as well as certain administrative fees.
Additional fees can include the cost of distribution expenses and shareholder service expenses. These are known as 12b-1 fees and under National Association of Securities Dealers rules, the fees used to pay marketing and distribution expenses cannot exceed 0.75 percent of a fund’s average net assets per year.
When people are paid to answer investor inquiries and provide information about investments these costs are considered shareholder service fees. Shareholder service fees are limited by the NASD to 0.25 percent of a fund’s average net assets per year.
Expenses not included in the above categories can include legal and accounting expenses, transfer agent expenses and administrative expenses that are not part of management fees.
Comparing funds
Because of differences in the fees charged by different funds, the net investment result can vary widely. A mutual fund with a seemingly lower return may in fact earn you more than a higher returning fund with greater expenses.
The U.S. Securities and Exchange Commission offers a mutual fund cost calculator to help investors determine the actual cost of owning particular funds. In addition to fee information found in the prospectus, you also will need an estimate of the length of time you intend to own the fund.
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