Understanding the Various Expenses Charged by Mutual Funds

There are a number of fees that mutual funds may legally charge shareholders. The fees can be one time charges or annual charges. The types of fees imposed depend upon the fund being rated as a Load Fund or No-Load fund.

Load vs. No-Load Funds

A Load mutual fund charges a number of fees to pay for sales related expenses. These funds are marketed to the public by various authorized representatives who receive a commission for selling these products. If a person receives a call at dinner time trying to sell a mutual fund product or if an accountant tries to convince a person to buy certain funds, the person can be fairly sure these are Load funds and the seller will receive a commission. Why else would they bother trying to sell a certain fund?

No-Load mutual funds do not charge any sales related fees. There will be advertisements on TV about the funds, but that is about it. Sales calls are not made, and no one tries to pressure people into buying the funds since no commissions will be paid for doing so.

Here is a general description of the various fees an investor may encounter.

Sales and One Time Fees

  • Sales Load – The commission the fund pays to brokers for selling the funds. Sales loads are subject maximum of 8.5% of assets with most being in the 4% range. This is a front end fee which is paid when buying a fund.
  • Deferred Sales Charge – This is a back end fee which is paid when you leave the fund.
  • Contingent Deferred Sales Load – This is a sales fee that lessens over time and is designed to encourage investors to hold onto their investments. For example, withdrawal amounts made in the 1st year may get hit with a 2% fee, 2nd year – 1% fee, 3rd year – no fee.
  • Redemption Fee – This is a fee charged when leaving the fund. Since this fee is used to pay redemption expenses rather than sales expenses, it listed as a separate fee distinct from Deferred Sales fees. To the investor, this amounts to the same thing. The SEC limits the redemption fee to 2% of assets.
  • Exchange Fee – some funds impose a fee if an investor wants to trade in shares for another mutual fund.
  • Purchase Fee – This sounds like front end sales load but the fees go to the fund and not to a broker.

Annual Account Fees

  • Management Fees – these are the annual fees to cover the expense of managing the fund.
  • (12b-1) Fees – These fees are charged annually to cover marketing and advertising costs. To the investor, these are nothing more than annual sales loads.
  • Account Fee – This is an account maintenance fee and is usually a flat dollar amount such as $20.
  • Other Expenses – This is the catch-all fee that may cover such expenses as legal fees.

Investors Should Focus on No-Load Funds

An investor might expect that Load funds should have higher overall investment returns historically. Various studies confirm that there is no connection between past investment returns and the level of expenses charged. The average investor investing for the long term should focus on No-Load funds from large, well-known mutual fund companies.  These companies charge only annual management fees, possibly a small annual account fee, and fees for moving money in and out of a fund too often. There are no sales charges.

Some of the large No-Load mutual fund companies are T. Rowe Price, Vanguard and Scudder.  These companies provide high quality funds, low costs and a high level of customer service.