Mutual Fund Costs

When you invest in mutual funds you have to understand all the costs involved.  There are two major classifications: Load Funds and No Load Funds.  However, it is not that simple. You have to dig deeper to understand all the costs.  Here are some of the terms you may encounter.  You might be charged with only one, or a combination of fees. Again, check the prospectus.

  • No Load Funds:  Funds sold directly to the public.  They do not charge a sales commission.  This however, does not mean there are no fees attached to the fund. Just like load funds they too will have management and possibly other fees (see below).
  • Load Funds:  Sold through brokers which charge a commission.
  • Front-End Loads:  Commission is paid when you purchase a share.  These fees vary based on the fund.  The fee can also be on a sliding scale, decreasing for larger investments.  The load is calculated on the gross amount of the investment (commission is taken out first).  This means that if you are investing $1,000, and the load is 3% ($30.00), this would be deducted first, therefore your investment in the fund would actually only be $970.00.
  • Back- End Loads (aka: Redemption Fees or Deferred Sales Fee:  These are charges that can be deducted from your original investment if you redeem the shares (sell them) within a specified time (described in the prospectus).  Generally the fee declines over time and sometimes is cancelled altogether if you hold the fund for a specific period of time.  For example the fee may be 4% if you sell within the first year and go down to 3% if you sell after 2 years.  This is done to discourage people from frequently changing funds.
  • Management Fees:  All mutual funds charge management fees.  It can either be a flat fee or a sliding fee based on the value of the fund's portfolio.  However some management fees actually rise if the manager beats a pre-determined benchmark or falls if they trail a certain benchmark.  Remember, management fees are separate from “sales” fees.
  • Marketing Fees:  Many funds deduct the cost of advertising and marketing from the fund's assets rather than absorbing them in the management fees.  Regardless of where they put the charges, you end up paying for them.  These charges are called 12-b-1 fees.  These fees can vary however, if the 12-b-1 fee is great than 0.25% per year, it may not be called a “no-load” fund.
  • Administration Fees:  Fees for all the paperwork involved in managing a fund, legal fees, accounting fees, sending out statements etc.
One way to find out about the expenses/fees charged by a fund is called the Expense Ratio.  This is shown as a percentage of the fund's assets. It includes all fees, except sales loads (deferred or front-end).  The higher the ratio the less paid out to shareholders. In general try to avoid paying a sales load and look for a fund with a low expense ratio.