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Understanding the Different Types of Mutual Fund Fees

By June 10, 2008

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Most people are fully aware that investing usually involves fees or commissions, and mutual funds are no different. We are always told to invest in funds with low fees so that we can maximize our returns. It makes perfect sense, but what are all the different types of fees you hear about?

  • Sales Charges - These are also called loads, but it is the fee based on a percentage that is applied to your purchase of a mutual fund. Funds can have front-end loads that are applied once upon the initial purchase,or back-end (also known as deferred loads) that may be applied over time or upon sale of the fund. Generally, front-end load funds are called Class A, and back-end loads will be Class B shares. There are also many mutual fund companies and special share classes that offer no-load funds. The total cost of the sales charge can vary and range anywhere from under 1% to over 5% of your investment.
  • Management Fees - Even if your fund has no sales charge, it still costs money to run and manage the fund. These fees are paid by investors in the form of an ongoing expense that is subtracted from the fund's performance. Management fees pay the fund managers and employees of the fund company. Management fees can range from just a fraction of a percent to over 1% per year.
  • Administrative Fees - In addition to the management fees, administrative fees pay for other operating expenses of running the mutual fund. These expenses include statement mailing, record keeping, customer service, and so on. You can expect to pay anywhere from 0.1% to 0.4% each year on average.
  • Marketing and Distribution Fees - Some funds also charge fees to cover the cost of marketing and promotion for the fund. These fees are commonly referred to 12b-1 fees.
While it may seem like there are a lot of fees to be concerned with, it isn't as complicated as you might think. The management, administrative, and 12b-1 fees are all added together and typically reported as the fund's expense ratio. The expense ratio is what is most commonly reported on financial websites. For example, if a fund has no load or sales charge, and an annual expense ratio of 0.5%, that means every $1,000 invested in the fund will basically cost you $5 in fees each year. Of course, you don't pay these fees out of pocket, but they are automatically factored in and deducted from the fund's performance.

With the many layers of fees, you can see that it can be costly if you wind up paying a sales charge and an additional high expense ratio from the other fees. Your best bet is to stick to no-load funds with low expense ratios if you do your investing on your own. It is also a good idea to check on your 401k fund offerings if you participate in one so that you can take advantage of the low-fee funds if they are available.
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