A mutual fund represents money contributed by multiple investors. That money is managed by an individual, or more likely, a whole slew of individuals. Not surprisingly, those folks who help manage and oversee your money do not do it on a volunteer basis. They get paid. Do you want to guess who pays them? You do – through your fees assessed by the mutual fund. As an investor, mutual fund fees is one of five things everyone should know about mutual funds.
What are the Different Mutual Fund Fees?
When you look at the mutual fund prospectus, the mutual fund is required to disclose all its fees. In addition, they will include a chart that shows you how the expenses and fees would impact a $1,000 investment.
Remember, fees are not inherently bad. But, there are many people who think this is one of many problems with mutual funds. The mutual fund company does need to pay for the cost of overseeing your money. Exorbitant fees can cut deeply into your potential profit. You should also remember that all mutual fund companies charge fees and they simply adjust or allocate the fees in different ways – often with the hope of making you think you’re not paying any fee.
Loads
A load is a sales commission paid either when you buy the mutual fund or when you sell it. When the sales commission is added at the time you purchase the fund, it is called a “front-end load”. Not surprisingly, when the commission is added upon selling, it is called a “back-end load”.
Load payments typically end up in the hands of brokers or sales agents. I left my previous financial advisor because he could not recommend something without a load.
The biggest problem with a load is it automatically limits how much of your money will be working to increase your gains.
Management and Expense Fees
The management fees cover the cost of overseeing your investments. They help pay for everything from computers, to mailings, to salaries. Just think big offices and high overhead, and you know where this percentage of your money is going.
An average expense is between 0.25% and 1.5%. Most people suggest investors avoid funds that have fees over 1.5%. My personal feeling is that if you are paying a higher management fee, but you are getting better returns, then the expense fees really do not matter.
12B-1 Fees
Typically if a fund does not charge a load, you can expect that they have a higher …