Understanding mutual fund fees and their impact on investment is the key to successful investing. By learning about the types of fees associated with mutual funds, one can make the appropriate investment choices. Besides fees, other factors that should also be considered are: the fund’s long-term performance, its investment style, the strength of the management team, and its risk volatility profile. Of considerable importance to many investors are the additional features and services offered by a fund, such as round-the-clock
assistance, automatic dividend reinvestment, and no-fee exchanges and redemptions. Key mutual fund charges are presented in the boxed insert.
MUTUAL FUND CHARGES Front-end load. An initial sales expense
(3 percent to 8.5 percent) that is charged before the shares are purchased. Some of this money goes to managing the fund but most of it goes to paying sales commissions.
Exit fee. A charge to cash in any shares of the fund. It’s usually a flat rate or 1 to 2 percent of the proceeds.
Back-end load. A deduction taken from the proceeds of the sale of shares. The percentage charged usually decreases as the length of time over which shares are held increases.
Managing fee. Used to cover costs such as salaries, expenses, and so on.
Re-load. A charge to reinvest the gain
and/or cash dividends. 12b-1 fee. Used to cover advertising, commissions, and other costs.
Transfer fee. A charge to switch from one fund in the company to another. It is usually 0.5 to 1 percent.
Load or Sales Charges
All load mutual funds charge a load in the form of a fee or sales commission on the sale of their shares. There are two kinds of loads: front-end load and back-end load.
As the names imply, the front-end load charge is a fee up front when the fund share is purchased, whereas a back-end load is charged when the share is sold. No-load funds do not charge either the front-end or the back-end load. The front-end load can range between 3 and 8.5 percent, whereas the back-end load is usually much lower, ranging from zero to 5 percent.
Most investors naively assume that, based on cost considerations, no-load funds are always more preferable to load funds. That is not a valid assumption. If net of loads, a load fund, consistently delivers superior returns, then it makes sense to consider paying that load.
Management Fees and Operating Expenses
All mutual funds—both load and no-load—charge management fees and operat- ing expenses. These expenses represent the amounts paid to portfolio managers for managing their portfolios, and to others for providing administrative services such as maintaining shareholder records, and furnishing shareholder statements and reports. These fees are reflected in fund’s share prices and are not charged directly to
shareholders. The management and operating fees usually range between 0.15 per- cent and 2 percent of a fund’s total asset value.
12b-1 Fee
The SEC created this fee to help mutual funds recover the costs of promoting and selling fund shares. Most load funds, and some no-load funds, routinely charge an annual 12b-1 fee of up to 0.75 percent. Mutual funds can also tack on an additional 0.25 percent for shareholder assistance and account mainte- nance. When the 12b-1 fees were introduced, it was expected that as funds grew, in part through successful marketing, the portion of expenses borne by each shareholder would diminish. Unfortunately, that has not been the case.
Most load funds families have merely added the 12b-1 fees to their charges, although a few have reduced or eliminated front-end loads in exchange for collecting the 12b-1 fees.
Redemption Fees
Some funds charge a fee even when shares of one fund are exchanged for shares of another from the same company. Other funds may charge a fee only when fund shares are liquidated and the proceeds are mailed to the investor.
That is, at redemption, the investor may be charged a redemption or exchange fee, or the investor may have to pay a back-end sales charge known as contin- gent deferred sales charge (CDSC). The difference between the two is import- ant. A redemption or exchange fee is often returned to the fund itself, rather than to the management company. This arrangement benefits long-term inves- tors in the fund because they are not paying the transaction costs attributable to investors who are getting in and out of the fund on a trading basis. By contrast, a CDSC goes to the management company to pay sales commission.
The fee is imposed on shares redeemed within a specific period following their purchase and is usually assessed on a sliding scale beginning at 4 to 5 percent of the fund value in the first year, decreasing to zero in the following five to six years.
Trustee Fees
Every mutual fund is governed by an independent board. A somewhat biased study tracking the 82 largest fund families found a correlation between the level of trustee compensation and fund expenses. In order to find out how advisors are compen- sated, one should consult the prospectus supplement—the Statement of Additional Information—which breaks down the costs that make up the other expenses.
Supermarket Charges
One-stop fund shopping allows investors to buy from various fund families and have the investments consolidated in a single monthly statement. For a fund to participate in such a supermarket, it must pay the sponsor an annual fee of 0.25 to 0.35 percent for every dollar invested.