|
Understanding Fees and Expenses
Understanding mutual fund fees and their impact on your investment is a key to
successful investing.
By learning the types of fees associated with mutual funds, you will be
better able to make the right investment choices for you. We suggest,
however, that fees be evaluated as one element in your investment selection
process and not the only factor in selecting the appropriate funds for
you.
Sales Charges
Direct-marketed mutual funds are sold directly to you without a broker
or salesperson, and as a result, the majority of them are no-load funds,
with no sales fees or loads deducted from your purchase to pay a sales
commission. We suggest that you obtain the information necessary to make
your own mutual fund investments and buy no load funds directly to avoid
this unnecessary charge.
Share Classes of Mutual Funds
No-load funds do not have share classes and are offered for sale without
brokerage fees or sales loads. Costs associated with the purchase and
sale of other 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. Each share class
has different sales charges, or loads, and different fee structures. Which
class of shares you choose will depend on how much you are going to invest
and how long you will leave it in the fund. Here are the basic definitions
of share classes:
- 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 redeption 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.
Some funds offer D shares as well as many others, most of which are variations of the three
basic classes. Always read the prospectus for the funds you are purchasing
to determine what if any fees are associated with the investment and to
determine if the fee is in line with your own goals and with the advice
or services you will receive in return.
Management Fees and Operating Expenses
All mutual funds, regardless of whether they are load or no-load, 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
Named for the Securities and Exchange Commission (SEC) rule that originated
it, a 12b-1 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 Fees
Some funds charge a fee when you redeem (sell) or exchange your shares
for shares of another fund from the same company. This can be a simple
fee at redemption or an exchange fee, or a contingent deferred sales charge
(CDSC). The difference between the two is important.
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.
A CDSC, sometimes called a back-end load, goes to the management company
to pay sales commissions. The fee is imposed on shares redeemed within
a specific period following their purchase and is usually assessed on
a sliding scale beginning at 4-5% of the fund value in the first year,
decreasing to zero over the following four or five years. No members of
the Mutual Fund Education Alliance levy these charges on their funds.
If you are comparing results of a load fund to a no-load fund, you must
adjust performance results to include the load or redemption fee for a
more accurate evaluation.
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.
Previous Page Back to Basics Main Next Page
|
