Types of Mutual Fund Fees
Investing in a mutual fund incorporates the payment of various fees. In order to make educated investment decisions you should be aware of them and think of them as one of the factors that determine the type of investment you are to make. Since fees represent an additional expense you should carefully consider them when investing in a mutual fund.
Some of the fees you will encounter include:
- Sales Charges
Sales charges represent fees that you pay to the broker or salesperson that has managed to attract you to the particular mutual fund. However, there are direct-marketed mutual funds that eliminate salespersons and brokers. So, it is good to search for such funds and directly purchase from the mutual fund company that offers them.
- Management Fees and Operating Expenses
Management fees and operating expenses are found in every mutual fund with no exception. These fees represent the money paid by the mutual fund to the investment advisor in return for his/her service of managing the portfolio of the fund or the provision of any other service. However, these fees are not directly charged to the shareholder. Instead, they are included in the fund's share price.
- Redemption Fees
In case you decide to sell (redeem) or exchange the shares you hold for other shares of another fund within the same mutual fund company, the latter may charge you a redemption fee. Generally, this fee is returned to the mutual fund and doesn't go to the company that manages the mutual fund. As a result, long-term investors benefit from this since they evade paying transaction costs.
Redemption fees can be:
- Simple fee at redemption
- Exchange fee
- Contingent deferred sales charge (CDSC), also known as back-end load
This type of fee goes to the management company for the purposes of sales commission payment. The fee is estimate on the basis of a time period after which the shares that are to be redeemed have been purchased and are calculated on a sliding scale starting from 4-5% of the value of the mutual fund in the first year.
- 12b-1 Fees
12b-1 fees have been created through the Securities and Exchange Commission (SEC) and allow mutual funds to cover some of their marketing costs through them. Investors can easily find information on their amounts specific to the particular mutual fund company since they are clearly stated in the prospectus of the fund.
- Expense Ratio
When you select a mutual fund you should be aware of its expense ratio. It represents the total expenses of the fund divided by its net asset. The expense ratio includes:
- Management fees
- 12b-1 fees
- Shareholder mailings costs
- Other administrative costs
Expense ratios should play an important factor when selecting a mutual fund, since it presents the potential costs you will incur in the future. In order to determine whether it is worth to put your money in a particular mutual fund you should closely examine the past performance of the funds as well as the additional service advantages that are provided.
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