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Tags: finance, stock mutual funds, the mutual fund cost
 Like running any business, running a mutual fund also involves costs. This can include shareholder transaction costs, investment advisory fees, marketing, and distribution expenses. A mutual fund would pass these costs to their investors by the imposition of fees and expenses. You need to understand these charges by breaking down the mutual fund cost and expenses because they do lower your returns.
Depending on the type of mutual fund, you may be charged a shareholder’s fee which gets directly imposed on investors like you whenever you buy or sell your shares, in addition to the regular, recurring, fund-wide annual operating expenses which are typically taken out of the account assets. This means you pay for these costs indirectly.
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The costs and expenses are usually disclosed in a table typically printed near the front of the prospectus. Let’s start with shareholder fees. The first one is the sales charge on purchases which is the amount you pay when you buy shares in a mutual fund. This is also known as the front end load.
This typically gets paid to the brokers that handle the transaction. So if you plan to invest $1,000 on a mutual fund that has a 5% front-end load, $50 goes to the brokers and only $950 gets invested in the account. The second cost charged is the purchase fee which may also be charged to shareholders when they buy shares.
it is paid to the account itself and is used to defray some of the costs associated with the purchase. The third is the deferred sales charge which is what you pay when you sell your shares and is the opposite of the sales charge. Also known as a back end load this gets paid to the brokers who handle the transactions.
Fourth is the redemption fee. This is charged if you sell or redeem your share in the account. This gets paid to the account and is used to defray the costs associated with the redemption. The fifth is the exchange fee, a cost imposed on you if you transfer to another account within the same family group.
The last shareholder cost is the account fee. This is a charge that is sometimes imposed on certain investors in connection with maintaining their accounts active. An account maintenance fee may be charged on accounts whose value is less than the required minimum dollar amount. Now let’s talk about the annual operating expenses.
The expenses of a mutual fund are represented by the expense ratio, sometimes referred to as the management expense ratio (MER). The expense ratio is composed of the following units. The first is what’s called management fees. On average, it is a cost between 0.5% and 1% of the asset value of the mutual fund.
This is paid out of the account's assets to the investment adviser for investment portfolio management. The second is what’s called administrative costs. These include necessities such as postage, record keeping, and even customer service. Finally there are the distribution and/or service fees otherwise known as the 12b-1 fees. These fees are taken out of the account's assets to cover the expenses of marketing and selling shares and to cover the costs of providing shareholder services.
The distribution fees include those used to compensate brokers who sell shares and to pay for the advertising, the printing and the mailing of prospectuses and sales materials to potential investors. On the other hand shareholder service fees are paid to those people who respond to investor inquiries and provide them with information about their investments.
When deciding on the mutual fund, be sure to review the fee tables carefully. Even small differences in charges can translate into large differences in your rates of return over time.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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