As we’ve learned, Mutual funds are great ways to diversify risk and make money. However, the fees charged on mutual funds are often difficult to understand. The following information can help you sift through the jargon to determine how much you are truly giving up for fund management.
Below are the basic components of mutual fund fee structures:
· Sales Charges (or Sales Loads): The fee applied to an investment at the time of initial purchase. Sales loads range from three percent and eight-and-a-half percent. Sales loads are usually only present when purchasing funds from stockbrokers, financial planners, investment advisors, and mutual fund companies. The reasoning behind sales loads is that the sales loads cover the level of effort of the sales person who sold you the fund and helped you select the fund for your portfolio. Unfortunately, sales loads are sometimes present on funds purchased directly from fund companies even when no one helped you with the selection. All other things being equal, one would prefer “no-load” funds.
· Redemption Fees: Redemption fees are also called “back-end load fees.” Some funds charge a percentage fee when shares are sold. Often this fee is reduced or waived if shares are held for a minimum amount of time.
· Management fees: Most funds pay a management fee to the fund managers based on the total assets in the fund. This fee is extracted from the customers’ accounts and covers all administrative costs associated with running the fund
· 12b-1 fees: Although many funds choose to include all costs under the management fee, some funds set aside up to one-and-a-quarter percent of assets to cover marketing costs.
· Expense Ratio: A fund’s expense ratio is the total amount that a fund takes out to cover all expenses. This amount is expressed as a percentage of the value of the fund and does not include any sales charges.