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Mutual Funds: Fees & Expenses

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. Here are four terms to know:

1. Front-end load: a commission you pay at the time you buy the shares, which can range between 2 percent and 5 percent
2. Back-end load: a charge you pay only if you sell your shares during the period the charge applies, which can be several years after purchase
3. Level load: an amount the fund collects every year you hold the fund
4. No-load: funds that don’t impose sales charges but might have other fees (you typically buy no-load shares directly from the investment company that offers these funds)
 

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.

Breakpoints

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, a front-end load 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.

Sales Charge Waivers

To maximize your investment, be sure to understand and explore any potential sales charge waivers. Here are five to be aware of:

1. Mutual Fund Exchanges

Mutual funds typically allow investors to sell shares in one fund and purchase shares in another fund in the same fund family on the same date without incurring sales charges.

2. Rights of Reinstatement

A fund family may allow customers to redeem or sell shares in a fund and reinvest some or all of the proceeds without paying a sales charge or recoup some or all of a contingent deferred sales charge (CDSC). Generally, in order to be eligible for this type of waiver:

  • The reinvestment must be made within a specified period of time (e.g., 90 days, although time periods may vary substantially across fund families);
  • The redemption and reinvestment must take place in the same account;
  • The redeemed shares must have been subject to a front-end or deferred sales charge; and
  • The redemption and reinvestment must comply with any other terms and conditions required by certain investment companies (e.g., reinvestments must be made in the share class of the redeemed fund).

3. NAV Transfers

Some fund families allow customers to purchase class A shares without paying the front-end sales charge if the customer purchases such shares using proceeds from the sale of shares in a different mutual fund family for which the investor paid a front-end or back-end sales charge; these transactions are sometimes referred to as "NAV transfers." Most fund families that allow for such waivers require the customer to invest the proceeds from the sale within 30 to 90 days.

4. Waivers for Retirement Accounts and Charities

Some fund families waive the front-end sales charges associated with Class A shares for certain retirement plans and charitable organizations.

5. Waivers for 529 Plans

529 plans offer sales charge waivers in a variety of specific situations, such as:

  • Existing account owners currently investing in charge-waived A shares;
  • Group 529 plans;
  • Plans purchased through an investment adviser;
  • Certain customers approved for discount by the program manager or broker-dealer;
  • Rollovers from qualified 529 plans; or
  • Special share classes.