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Mutual Fund Fees Glossary

This article provides an insight of the main types of costs it is possible to encounter when dealing with mutual funds. Whatever the type of your mutual fund, you should strive to minimize the costs, since they can represent a burden on your potential returns. In order to make it more convenient for you, we have ordered the list of potential fees and other costs in an alphabetic order.

12 (b) - 1 Fees

This type of fees is levied for the mutual fund to cover its marketing costs. It is not reasonable for the investor to pay fees for the attraction of other investors since the first does not enjoy any direct benefits.

Additional Distribution Costs

Though you may not find information about this type of fees in the mutual fund prospectus, they represent a considerable portion of the expense ratio. They are basically paid for the shelf space on the No-Transaction Fee networks that are provided by many discount brokerages. These fees represent a burden on the financial resources of the investors since it will be better for them to pay a one-time transaction cost instead of incurring large expenses continually. For example, Schwab, Waterhouse and Fidelity charge as high as 0.35% annually their investors.

Annual Account Charges

These account charges are levied by most mutual funds in order to pay for their administrative costs. The charges vary from $10 to $25 per year and are also used as means of equalizing the incurred costs between large and small mutual fund investors. In this way the mutual fund aims to charge lower expense ratio. Unfortunately, such charges can be a burden on investors with smaller amounts of money in their accounts.

Back-End Fees (also known as Contingent Deferred Sales Charges or B Shares)

The back-end fees are charged as a result of the commission the mutual fund should pay to the broker that has attracted the investor to the mutual fund. The latter should cover in some way this expense so it does it by charging the investor an additional annual expense in excess of 1% annually. This fee is collected forever, or until you decide to exit the fund. Mutual funds that charge back-end fees present the highest cost of investment for the investor. Additionally, the investors with larger deposits gain no benefit from this. What is more, if you decide to exit the mutual fund prematurely, an additional contingent sales fee will be charged until the repayment of the shares. What makes the situation worse is the fact that the amount is calculated on the basis of the entire balance, not the initial deposit.

Expense Ratio

The expense ratio includes costs on management fees, custody fees, mailing expenses, utilities and rent and etc. Generally, it covers the expenses that the mutual fund incurs due to its daily activities and necessities. The expense ratio can be as low as 0.15% and as high as 2.00%.

Front-End Fees (also known as A Shares)

The front-end fee is charged on your entrance of the mutual fund. The higher the amount of the deposit the lower the percentage of the back-end fee that is charged. They usually vary between 1% and 8.5%. As a result, if you have started with a $10,000 deposit, you will be subject to a 5% back-end fee. But if this amount accumulates to $200,000 the percentage is significantly decreased to as low as 3%.

Level loads (Also known as C Shares)

The level loads go directly to the pockets of the sales department and are levied annually. If you purchase a mutual fund that includes such a load, every year your account will be reduced by 1% due to the required payment of the level load. No matter how large is the sum of your deposit, you will have to pay the same 1% year after year until you decide to exit the mutual fund.

No Load Funds

Our highly recommended type of mutual fund, since it doesn't include whatsoever charges and fees. They are usually used as a standard of measurement against the other mutual funds that are evaluated.

Sales Charges

Paid directly by the investor, the sales charges go to the broker that has attracted the investor to the mutual fund.

Final Piece of Advice: Whenever it is possible to choose the mutual fund, avoid the loaded ones since they will end you up with less money to invest due to the many fees they have in order to cover their expenses.

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