Understanding fees and expenses

By learning the types of fees associated with mutual funds, you will be better able to make the right investment choices for you. Keep in mind that fees should be evaluated as just one element in your investment selection process and should not be the only factor in selecting the appropriate funds.

Sales charges and share classes

No-load funds are offered for sale without brokerage fees or sales loads. Costs associated with the purchase and sale of other types of mutual funds are defined in specific terms, depending on the type, or class, of fund you choose…and how you purchase it. Different types of funds, or share classes, have different charges to cover the cost for any advice you receive in selecting the fund.

* A Shares: Typically called load funds and offered through brokers, these funds are sold with an initial, or front-end sales charge (usually 3-6%) that is deducted from your initial investment. Also, these funds most always charge a 12b-1 marketing fee (on average, around 0.25%) which is deducted from the fund’s assets each year.
* B Shares: These funds have no front-end sales charge, but carry a redemption fee, or back-end load that you pay if you redeem shares within a certain number of years. This load (called a CDSC or contingent deferred sales charge) declines every year until it disappears-usually after six years. B share funds also carry a 12b-1 marketing fee which is typically higher than the 12b-1 fee of A shares. After the time period ends some funds will convert B shares to A shares so your fees are reduced (but sometimes they don’t).
* C Shares: Know as a “level-load” share, C shares have no front-end sales charge and no redemption fee, but they carry a 12b-1 marketing fee which you pay for as long as you hold the fund. It is similar to no-load funds that charge 12b-1 fees.

There may also be other classes of shares with different combinations of fees. These are shown in a fund’s prospectus, which you should review carefully.

Fees and expenses

*

Management Fee: All mutual funds have management fees and operating expenses. It is the amount that the fund pays to the investment adviser for managing the fund’s portfolio or providing other services, such as maintaining shareholder records or furnishing shareholder statements and reports. These fees are reflected in the fund’s share price and are not charged directly to the shareholder. The management fee usually ranges from 0.5% to 1% of the fund’s total asset value but may be higher for specialized funds.
*

12b-1 Fee: This fee permits a fund to pay some or all of the costs of distributing its shares to the public. Some of these plans provide for payment of specific expenses such as advertising, sales literature and sales incentives. They are not hidden charges and are explained in the fund’s prospectus. For a fund to be called “no-load” its 12b-1 fee must not exceed 0.25% of assets.
*

Redemption Fee: Some funds charge a fee when you redeem (sell) or exchange your shares for shares of another fund from the same company. A redemption fee is often returned to the fund itself, rather than to the management company. This arrangement benefits long-term investors in the fund because they are not paying the transaction costs attributable to investors who are getting in and out of the fund on a “trading” basis.

Expense ratio

The expense ratio is the ratio of total expenses to net assets of the fund and includes management fees, 12b-1 charges if any, the cost of shareholder mailings and other administrative expenses. The ratio is often a function of the fund’s size, rather than the operating efficiency of the fund management, but can also depend on the nature of the investments in the fund.

Since it is important to keep fees and costs as low as possible, investors should examine expense ratios as another method of evaluating whether a particular fund is suitable for their own investment portfolio. Investors should consider past performance objectives of the fund and other service advantages the fund offers, then determine if investment in the fund is worth the costs associated with it.

– Courtesy of Mutual Fund Education Alliance.