Mutual Fund Expenses

Why are mutual fund expenses important?

  • All mutual funds charge you some fees to cover on-going expenses, but the amount of the fees varies among funds. These expenses will cut into the amount of money that you make from the mutual fund.
  • Some also charge a sales commission, or “load” when you buy or sell shares of the mutual fund.
  • High expense funds, and load funds do not perform better than no-load, low-expense funds.

There are two main types of expenses:

  • Annual Operating Expenses or the Expense Ratio:
    All funds charge a management fee that you pay each year and are subtracted from the assets you have in the mutual fund. Some funds charge additional fees:
    • Management or investment advisory fees - pay fund managers and range on average from 0.5 to 1.0%.
    • 12b-1 distribution fee - covers sales commissions, marketing, and distribution fees. Many funds do not charge a 12b-1 fee, and you should avoid it. Load funds use this fee a lot, which can range between 0.25% and 1.0% each year.
      No-load funds cannot charge more than .25% in 12b-1 fees.
    • Other administrative fees cover the cost of a toll-free line, printing, mailing, and other services.

    Expenses and fees can really add up over time. The chart shows what would happen, for example, if an individual invested $1,000 in a fund that earned a 5% return, and kept it there for 20 years. Without expenses, the investment would grow to $2,786.

  • Sales Commission (or Loads) and Transaction Fees
    • No-load mutual funds do not charge a sales commission, although they will have some of the on-going expenses listed above.
    • Front-end load - An up-front sales commission that you pay when you buy your shares.
      For example: You put $1,000 in a mutual fund with a 5% front-end load. $50 will pay the sales charge and $950 of your money will be invested. 
    • Back-end or contingent deferred sales load - An exit fee, charged if you sell your shares before a specified number of years.
      The load often starts at 5% or 6% if you sell your shares in the first year and gets smaller each year until it reaches zero.
      Back-end load funds often charge higher 12(b) fees, so even if you hold onto the fund until the load falls to zero, over time you may pay more in fees than with a front-end load.
    • Exchange fees - charged when you switch investments from one fund to another in the same fund family.

       

How do I find out what a fund charges in expenses?

When you contact mutual funds, ask each to send you a prospectus, a booklet that has a lot of information about the mutual fund. Near the beginning of the prospectus you will find a fee table listing expenses.

Other Useful Information About Fees

  • Check to see if any fees are currently being waived. When the waiver ends, you could suddenly be hit by a big fee.
  • Beware of the salesperson who:
    • insists you must buy load funds,
    • tells you “This is just like a no-load fund”, or
    • moves you around into different funds more often than once every two years, generating more sales commissions for him/herself.

 

 

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