A slice for the management team.
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When you invest in a mutual fund, the fundâs management team allocates your investment across the stocks, bonds, and other assets in the fund. The team conducts research, monitors investments, and buys and sells stocks to meet investor contributions and withdrawals. Plus, the fund managers calculate the value of each share at the end of every trading day, market the fund, and perform other administrative duties.
Key Points
- Mutual fund fees vary widely, as some funds are more expensive to run.
- Sales chargesâknown as âloadsââmay come up front, on the back end, or might not be assessed if you hold a fund long enough.
- Fees are included in every mutual fundâs prospectus.
For all of this work, each mutual fund charges fees.
The fees are calculated as an annual percentage of assets, although they come out on a prorated basis every trading day. Those fees, when added together and divided by the total assets in the fund, equal the fundâs expense ratio. The expense ratio helps you compare the costs of one fund to another.
Types of annual fees
- Management fees. The fund pays its portfolio manager and staff to buy and sell the investments in the fund. Management fees vary depending on the size of the fund and the strategy it pursues. A small fund with a complex strategy will have a much higher management fee than a giant fund that invests strictly according to a predetermined index.
- Marketing fees (12b-1 fees). These go to the fundâs manager to promote the fund or compensate the people who sell the fund. Not all funds carry these fees. They can be significant, depending on where you buy a fund or who you buy it from. For example, mutual funds purchased from a brokerage firmâs mutual fund âsupermarketâ may carry higher 12b-1 fees, as might funds bought through a financial advisor.
- Administrative and other fees. These cover the fundâs expenses related to asset protection, trading, legal, and accounting services.
Mutual fund sales loads
When you buy a mutual fund through a broker or financial advisor, youâll likely pay a sales load, or sales charge.
There are two primary types of sales loads. One is a front-end sales load, which you pay when you invest in a fund. This is a percentage of assets that comes out of the money youâre investing.
The other is a back-end or deferred sales load. You pay that when you sell your shares. Back-end loads come in many forms, with some expiring if you hold your shares long enough (five years is a common holding period requirement to avoid a load). Fund shares with a back-end load often charge a higher 12b-1 fee.
Fees for no-load mutual funds
Many investors choose to buy mutual funds directly from a fund company or an online broker to reduce fees and eliminate sales commissions. But they still face some fees. Here are some common ones to watch for:
- Redemption fees. When you sell your shares, your fund may charge a redemption fee. Although it works like a back-end sales load, it isnât considered one, and is paid directly to the fund. Itâs imposed to prevent you from moving in and out of a fund too rapidly, which raises the costs of managing the fund.
- Exchange fees. Some funds charge these fees if they exchange their assets to another fund offered by the same fund group. Exchange fees are also imposed to prevent you from moving in and out of a fund too rapidly.
- Account fees. Some funds impose these fees to cover the maintenance of your accounts. Account fees are often assessed if the dollar value of your account falls below a certain level.
- Purchase fees. These fees are like a front-end sales load. But theyâre different because a purchase fee goes to the fund, rather than to the broker or advisor who sold it to you.
Expense ratio example: How fees affect returns
Letâs say you buy$10,000 of a mutual fund from your broker. The fund charges you:
- 5% front-end sales load
- 0.50% management fee
- 0.35% 12b-1 fee
- Administrative and other costs of 0.10% per year
Letâs assume the fund has a zero return for the first year, neither gaining nor losing any money. After the sales charge of $500 was assessed, the fund began that first day at $9,500. The additional fees, which total 0.95% (the expense ratio), would be:
$9,500 x 0.0095 = $90.25
At the end of the year, you would have spent $590.25 on fees, leaving you with $9,409.75.
Although the 5% load would be a one-time charge, the other fees would be ongoing. Thatâs why front-end loads arenât counted in the expense ratio.
This exampleâan expense ratio of 0.95%âis on the high side. In 2021, the average expense ratio of actively managed equity mutual funds was 0.68%, according to the Investment Company Institute. In contrast, the average expense ratio for mutual funds that track a major index, such as the S&P 500, was 0.06%.
Over time, the performance of your investments is whatâs important. But while the markets are uncertain, the fees charged by your fund are spelled out in the fundâs prospectus. They are unlikely to change, and their impact is a sure thing.
There are many tools to help you understand the impact of fees over time. And there are several ways to compare the cost, strategy, and past performance of similar funds. When reviewing the fees of a mutual fund, make sure they go toward servicesâsuch as experienced management or the guidance of a financial advisorâthat you believe will pay for themselves in the form of better investment performance over time.
This article was most recently revised and updated by Colin DoddsThis article was most recently revised and updated by Doug Ashburn
