All mutual funds have fees; some more than others. Below are the five broad fee types you find in mutual funds.
1. Management Fees – This Ongoing Fee Is In Every Mutual Fund
It costs money to run and manage a mutual fund. Some funds cost more to operate than others. Regardless of the cost, all mutual funds have a fee they call either a management fee, or an operating expense. This fee is deducted out of the total assets of the fund before your share price is determined.
For easy understanding of managment fees read Mutual Fund Management Fees And Chocolate Chip Cookie Dough, or see the example below.
Example: Let’s say you own a mutual fund that is valued at $10.00 per share. It has a gross return of 10%, meaning its total investment return was $1.00 per share. The fund manager deducts 1% in fees, so your actual investment return is 89 cents instead of the full $1.00.
As a general rule:
- have higher operating expenses than passive funds or index funds. This is because an actively managed fund is conducting ongoing research trying to determine the best investments to own. This research costs more, but statistics show you don’t get what you pay for.
- International funds have higher fees than domestic funds. It costs more to purchase investments that traded outside of the U.S. This higher cost is passed along in the form of higher mutual fund fees.
- Small cap funds have higher fees than large cap funds. It costs more to buy and sell small stocks than large ones. This higher cost is passed along in the form of higher mutual fund fees.
2. Sales Charge Or Commission – An Upfront Fee You Pay
When you buy an “A share” mutual fund, you will pay a fee, or commission, when you purchase the shares.
Example: Let’s say you are buying a fund that is valued at $10.00 per share and has a 5% front end sales charge. You will pay approximately $10.52 for each share purchased, as a 5% sales fee will be added on to the initial purchase price of your shares.
Many financial salespeople are paid by these types of loads or commissions. Learn more about how advisors charge in 6 Ways Financial Advisors Charge Fees.
3. Redemption Fees – A Fee You Pay When You Sell Shares
When you buy a “B share” mutual fund, if you sell shares of your fund within a specified time frame you will pay a redemption fee, also called a contingent deferred sales charge, or surrender charge.
Example: Let’s say you are buying a fund that is valued at $10.00 per share and has a 5% contingent deferred sales charge. If you sell your shares within one year of purchase, you would receive $9.50 per share. Usually this fee goes down each year, so in year two, it may drop to a 4% fee, in year three, 3%, and so on.
If you own your B share funds for the required amount of time, according to that fund’s schedule, than you will not incur a surrender charge when you sell them.
4. Short Term Trading Fees
Mutual funds are designed to be long term investments; short term trading fees have been imposed to discourage investors from trading in and out of funds. Mutual funds inside your 401k account may be subject to short term trading fees.
Short term trading fees are imposed when you purchase shares and then sell them again within 30-90 days. In this scenario the mutual fund may charge you a fee of 1-3% upon sale of the recently purchased shares.
5. 12b1 Fee, Service Fee, Or Distribution Fee
Many funds have an ongoing service fee, also called a 12b1 fee, which is paid to a financial advisor, or financial services company, as compensation for marketing the fund.
If you purchase a “C share” mutual fund it will typically have an extra 1% service fee, in addition to the management fee. Just like the management fee, this mutual fund fee will be deducted out of the total fund assets before your share price is determined.
Example: Let’s say you own a C share that is valued at $10.00 per share. It has a gross return for the year of 10%, meaning its total investment return was $1.00 per share. The fund manager deducts 1% in fees, so your actual investment return is 89 cents instead of the full $1.00.