Along with historical performance and the minimum amount of money required to open an account, one of the most criteria for selection of a mutual fund is the fees that are charged to investors. Costs matter in determining the return on a mutual fund, especially when compound interest over many decades is applied. Below is a description of common mutual fund costs.
? Front-End Loads or Sales Charges – These can range from 0 to 8.5 percent of the amount invested. Front-end loads are paid for the initial purchase of a mutual fund investment. The broker or financial advisor who selects and sells you the fund may receive a portion of this fee.
? Back-End Loads, Redemption Fees, or Exit Fees – These can range from 0 to 6 percent of the invested amount and are charged by some mutual funds when you sell fund shares soon after purchase. Back-end loads will typically decline with each year that you own the fund and disappear after you own it for a specified number of years.
? 12b-1 or Marketing Fees – These can range from 0 to 1 percent. The U.S. Securities and Exchange Commission allows mutual funds to charge what is known as a 12b-1 fee to cover marketing and distribution costs. These fees are taken from the fund’s assets each year.
? Management and Administrative Fees – These can range from .2 (one fifth of one percent) to 2.5 percent. All funds charge investors a management or administration fee that is a percentage of total fund assets. This fee is used to pay the mutual fund manager and research analysts, as well as for professional services such as legal and accounting fees. The lower the management fee, the better.
To learn more about the fees associated with a particular mutual fund, read its prospectus. A mutual fund prospectus is required to list all of a mutual fund’s operating expenses. This includes fees that are charged to investors individually (e.g., front-end loads) and those that are charged against the assets of a mutual fund (e.g., 12b-1 and management fees).
Prospectuses also include a fee table with an example showing how much of your investment goes to expenses over one, three, five, and ten years. Each illustration assumes a hypothetical $10,000 investment and a 5 percent return each year and that you sell your shares at the end of the time period. This standardized format allows investors to compare funds with different fees to determine how much these expenses will cost.
Over the long run, mutual fund fees add up, so look for funds with low expenses. All things being equal (e.g., fund performance), low-cost funds will net higher returns than high-cost funds. Both no-load and load funds charge annual money management and administrative fees. These costs are a percentage of the assets in the portfolio. These costs, in addition to the 12b-1 fee, make up a fund’s expense ratio (expenses as a percentage of fund assets). Beware of funds with expense ratios greater than 1.4% for stock funds, 1% for bond funds, and 0.5% for money market funds. This is an indication that a mutual fund is charging above-average expenses.
For further information about mutual fund investing, including fund expenses, review Unit 6 of Investing For Your Future at www.investing.rutgers.edu and the IFYF Study Guide. Another good source of investing information is the NASD Foundation Web site www.saveandinvest.org.