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Funds and Fees

Understanding Mutual Fund Fees

All mutual funds charge fees. Because small percentage differences can add up to a big dollar difference in the returns on your mutual funds, it's important to be aware of all the fees associated with any fund you invest in. Some fees are charged at specific times, based on actions you take, and some are charged on an ongoing basis. Fees are described in detail in each fund's prospectus, which you should be sure to read before investing in any fund.

Here are types of fees that may be charged on an ongoing basis:

  • Management fees. These fees pay the fund's portfolio manager.
  • 12b-1 fees. These fees, capped at 1 percent of your assets in the fund, are taken out of the fund's assets to pay for the cost of marketing and selling the fund, for some shareholder services, and sometimes to pay employee bonuses.
  • Other expenses. This miscellaneous category includes the costs of providing services to shareholders outside of the expenses covered by 12b-1 fees or portfolio management fees. You also pay transaction fees for the trades the fund makes, though this amount is not reported separately as the other fees are.

The following fees are based on actions you may take, so may or may not be amounts you pay:

  • Account fees. Funds may charge you a separate fee to maintain your account, especially if your investment falls below a set dollar amount.
  • Redemption fees. To discourage very short-term trading, funds often charge a redemption fee to investors who sell shares shortly after buying them. Redemption fees may be charged anywhere from a few days to over a year. So it's important to understand if and how your fund assesses redemption fees before you buy, especially if you think you might need to sell your shares shortly after purchasing them.
  • Exchange fees. Some funds also charge exchange fees for moving your money from one fund to another fund offered by the same investment company.
  • Purchase fees. Whether or not a fund charges a front-end sales charge, it may assess a purchase fee at the time you buy shares of the fund.

One easy way to compare mutual funds fees is to look for a number called the fund's Total Annual Fund Operating Expenses, otherwise known as the fund's expense ratio. This percentage, which you can find in a fund's prospectus, on the fund's website, or in financial publications, will tell you the percentage of the fund's total assets that goes toward paying its recurring fees every year. The higher the fund's fees, the greater its handicap in terms of doing better than the overall market as measured by the appropriate benchmark.

For example, if you were considering two similar funds, Fund ABC and Fund XYZ, you might want to look at their expense ratios. Suppose Fund ABC had an expense ratio of 0.75 percent of assets, while Fund XYZ had an expense ratio of 1.85 percent. For Fund XYZ to match Fund ABC in annual returns, it would need a portfolio that outperformed Fund ABC by more than a full percentage point. Remember, though, that the expense ratio does not include loads, which are fees you may pay when you buy or sell your fund.

FINRA provides an easy-to-use, online Fund Analyzer that allows you to compare expenses among funds—or among different share classes of the same fund. Using a live data feed that captures expense information for thousands of funds, the analyzer can help you understand the impact fees have on your investment over time. Once you select up to three funds, type in the amount you plan to invest and how long you plan to keep the fund, the analyzer does the rest.

You should also be aware of transaction fees, which the mutual fund pays to a brokerage firm to execute its buy and sell orders. Those fees are not included in the expense ratio, but are subtracted before the fund's return is calculated. The more the fund buys and sells in its portfolio, which is reported as its turnover rate, the higher its transaction costs may be.

Understanding Loads

When you buy mutual fund shares from a stockbroker or other investment professional, you might have to pay sales charges, called loads, which are calculated as a percentage of the amount you invest. Like commissions on stock or bond transactions, these charges compensate the broker for the time and effort of working with you to select an appropriate investment.

The rate at which you're charged varies from fund company to fund company. In addition, companies may offer different classes of shares, which assess the charge at different times. You'll want to be sure you understand the financial consequences of choosing a specific share class before you purchase a fund. You can use FINRA's Fund Analyzer to compare share classes.

Class A shares have a front-end load, which is a commission you pay at the time you buy the shares. The average range is between 2 percent and 5 percent, though it varies. This amount is subtracted from the total you're investing in the fund. For example, if you invest $1,000 in a fund with a 5 percent front-end load, $950 of your investment would buy fund shares, and $50 would go to your broker.

Class B shares have a back-end load, which you don't pay unless you sell your shares during the period the charge applies, which is usually up to seven years after purchase, though it could be longer or shorter. The load tends to drop, perhaps by a percentage point each year, and then disappears altogether. However, the annual fees that the fund charges on Class B shares are higher than the fees on Class A shares. Back-end loads are also known as contingent deferred sales charges (CDSC).

Class C shares may carry a level load, which a fund collects every year you hold the fund, or they may have a back-end load or CDSC, similar to B shares. Class C shares also tend to have higher annual fees than Class A shares, typically on a par with those that apply to Class B shares. In addition, C shares do not convert to another share class.

As their name implies, no-load funds do not impose sales charges and you typically buy shares directly from the investment company that offers these funds. The same funds may be available, with a load, from investment professionals. Remember, though, that while no-load funds have no sales charges, they may still charge 12b-1 fees, purchase fees, redemption fees, exchange fees, and account fees in addition to the operating fees that all funds charge.


Sometimes load funds offer volume discounts for higher investment amounts, in much the way that supermarkets sometimes offer economy bargains for buying certain things in bulk. In the case of funds, your front-end load, or Class A share sales charges, may be reduced if you invest a certain amount. The amounts at which your sales charges drop are called breakpoints. The breakpoints are different for each fund, and your broker must tell you what they are and must apply breakpoints if your investment qualifies.

Breakpoint rules vary, but some funds let you qualify for breakpoints if all your investments within the same fund family—funds offered by the same fund company—add up to the breakpoint level. Some funds let the total investments made by all the members of your household count toward the breakpoint. In addition, some funds let you qualify for a breakpoint over time, instead of with a single investment, by adding your past investments to your new ones. You might even qualify for a breakpoint if you write a letter of intent, informing the fund that you're planning to invest enough to qualify for the breakpoint in the future.

In short, funds can offer breakpoints any number of ways, or they may not offer them at all. Whenever you're entitled to breakpoints, however, the fund is required to apply them to your investment. To find out whether a fund offers breakpoints, use FINRA's Fund Analyzer.

Open-End vs. Closed-End Funds

One of key distinguishing features of a mutual fund, or open-end fund, is that investors can buy and sell shares at any time. Funds create new shares to meet demand for increased sales and buy back shares from investors who want to sell. Sometimes, open-end funds get so large that they are closed to new investors. Even if an open-end fund is closed, however, it still remains an open-end fund since existing shareholders can continue to buy and sell fund shares.

Open-end funds calculate the value of one share, known as the net asset value (NAV), only once a day, when the investment markets close. All purchase and sales for the day are recorded at that NAV. To figure its NAV, a fund adds up the total value of its investment holdings, subtracts the fund's fees and expenses, and divides that amount by the number of fund shares that investors are currently holding.

NAV isn't necessarily a measure of a fund's success, as stock prices are, however. Since open-end funds can issue new shares and buy back old ones all the time, the number of shares and the dollars invested in the fund are constantly changing. That's why in comparing two funds it makes more sense to look at their total return over time rather than to compare their NAVs.

Closed-end funds differ from open-end funds because they raise money only once in a single offering, much the way a stock issue raises money for the company only once, at its initial public offering, or IPO. After the shares are sold, the closed-end fund uses the money to buy a portfolio of underlying investments, and any further growth in the size of the fund depends on the return on its investments, not new investment dollars. The fund is then listed on an exchange, the way an individual stock is, and shares trade throughout the day.

You buy or sell shares of a closed-end fund by placing the order with your stockbroker. The price for closed-end funds rises and falls in response to investor demand, and may be higher or lower than its NAV, or the actual per-share value of the fund's underlying investments.