All mutual funds charge fees. The place you want to look for what you will be charged and what expenses those charges are accounting for, is in the prospectus. All mutual funds will have a Prospectus. A Prospectus is a formal legal document that is required and filed with the Securities and Exchange Commission (SEC). This document provides all the details you need to know about any specific investment product that is for sale to the public. A prospectus breaks down the offerings each Mutual Fund will have and is extremely helpful when considering investing into one. A fund Prospectus will contain details on the funds objectives, the strategy, any risks involved, a track record of performance, the policy for distributions, and most importantly the fees and expenses that will be incurred.
Mutual Fund Fees to Watch
Now lets look at the fees that you need to keep an eye out for when evaluating a Mutual Fund Prospectus. This is important because small percentage differences can be significant when considering returns on your investment. All expenses in a mutual fund can be summarized by finding the expense ratio. These are the total amount in fees that will be held from you when you’re looking at the return you received from the Mutual Fund. It is an indirect expense that you may not notice.
First lets look at Shareholder fees. These include Sales Loads fees. These fees are usually charged either upon entrance or exit from the mutual fund. The first is a Front-End Sales Load Fee and are the most basic type of load fee you will pay. You pay the fee when you purchase the fund. The second is a Back-End Load Fee and this is a little more complicated but simply put, is a fee you pay when you sell your shares in the fund. Some funds will have for example, a 6% Back-End Load Fee if you sell in the first year and then decrease by a percentage point each year and may even allow you to sell your shares in the fund for no fee after a certain year. Many Mutual Funds carry some combination of front and back end loafs. But there are some funds that don’t charge any Sales Load fees, these are referred to as No-Load Mutual Funds.
The next set of fees that can be charged when investing in a Mutual Fund are Operating Fees. The Management Fee is included in Operating Fees. Management Fees are paid out of the funds assets on an annual basis and is to the investment advisor for managing the fund. It can also be called the Hiring Cost. This type of fee is paid regardless of the performance the fund is providing. Keep in mind, The SEC states on their website “Higher expense funds do not, on average, perform better than lower expense funds.” Another fee included in operating fees is the Distribution Fee, also known as 12b-1 fees. This is the last part of the ongoing expense ratio. 12b-1 fees are directly taking from the funds assets annually and are considered expenses incurred to sell the fund. This can include paying commissions to the brokers selling the fund, advertising and promoting the fund. Also, when a portfolio manager is making changes to the fund, as in buying or selling individual holdings in the fund, they incur costs from transaction fees. These transaction fees are passed on to the investor in the fund. So this is another thing to keep in mind when considering a mutual fund. How much trading will be going on.
Other Mutual Fund Fees
Other expenses that can be included in a Mutual Fund are things like legal fees, custodial fees and administrative fees.
To summarize, expenses ratios can range from as low as 0.25% to as high as 2%. The difference is how active the fund may or may not be. The more active, the higher the fee to offset transaction costs. The more passive, the lower the fee for less work the manager may be doing regarding the fund.