Mutual Funds Fees Explained

Before making any investment, consider the fees and expenses that will take a cut out of your profits. Some mutual fund fees are completely avoidable, and some fees are necessary. Some types of mutual funds will require higher fees and maintenance costs than others; it’s important to compare similar funds with the same objectives from different fund families. A fee table can be found in the prospectus of any fund you’re considering, request this important reading material directly from the fund, before you invest.

Loads
A load is basically a sales commission. This fee can shave several percentage points from your profits to pay a stockbroker or salesmen. A front-end load will reduce the total amount of your investment, thereby reducing the amount of your money that goes to work for you, which makes loaded funds fall short of no-load funds. There are plenty of good mutual funds with no load, so you should avoid paying a load if you don’t need the services and advice of a stockbroker. Vanguard and Fidelity are two well-known fund families that offer no-load funds.

Exit or Redemption Fees
Exit fees are “back-end loads,” taking a cut of your profits when you sell your shares. Exit fees range from a flat 5-dollar fee to 2% of the amount withdrawn. Sector funds are more likely to charge exit fees.

12b-1 Fees
12b-1 fees are meant to go towards marketing and advertising costs, to bring more money into the fund. They do not benefit the fund in terms of performance. Under rules that came into effect in 1993, most 12b-1 fees are capped at .75%, down from an earlier limit of 1.25%. 12b-1 fees are charged every year, making them even worse than paying a load. As your fund account grows in value, the fee increases, since it’s based on a percentage of the fund’s assets. If you can avoid paying these fees, it will increase the amount of your investment that can go to work for you.

Purchase Fees
These fees are used to defray some of the cost when new investors invest in the fund. It is not considered to be a load since the proceeds go directly to the fund, not to a sales agent or broker.

Account Fees
This fee is charged to cover the cost of maintaining an account, and may be assessed for accounts that fall below a certain dollar amount. Most funds have a minimum investment required; be sure you invest enough to avoid this extra fee.

Deferred Sales Charge
This fee is a load charged when an investor sells his shares back to the fund. A deferred sales charge is intended to discourage frequent trading in the fund, these charges can be as high as 5% of assets. They are usually reduced each year until the fifth year, when they are no longer assessed. Look for funds that don’t have these extra fees.

Management and Expense Fees
Management and expense fees cover the cost of maintaining the fund. Seek a mutual fund that has lower management and expense fees, anything that is under about 1.5% is considered reasonable. Highly managed, aggressive growth funds that involved a lot of buying and selling of stocks tend to have higher management fees. On the other hand, index funds, which are mostly run by computers, tend to have the lowest management fees. Lower management fees let your money grow faster when you are investing for the long term; so it’s advisable to look do a little research to find those funds.