Fees and Expenses of Mutual Funds

Sales Charges

What does it cost to invest? Before investing, you should always find out what type of sales charge the fund uses to compensate the broker or sales representative who assisted in the purchase of the mutual fund. This commission, otherwise known as a "load", comes in three varieties:

Front-end load You pay a fee at the time of purchase (usually, a percentage of the total investment).
Back-end load You don't pay an initial fee, but you're locked into the fund for a predetermined period of time (outlined in the prospectus). If you hold the fund to maturity of the contract, you'll never have to pay a fee. However, if ou choose to redeem before this time, you will have to pay a redemption fee, which decreases on a percentage basis every year the fund is held.
Low-load You pay no fee upfront, you will pay a fee if you redeem (usually a percentage of the original investment.)

Fees and Expenses

As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns.
Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses". Funds typically pay their operating expenses out of fund assets — which means that investors indirectly pay these costs.
SEC rules require funds to disclose both shareholder fees and operating expenses in a "fee table" near the front of a fund's prospectus. The lists below will help you decode the fee table and understand the various fees a fund may impose:

Shareholder Fees

Sales Charge (Load) on Purchases — the amount you pay when you buy shares in a mutual fund. Also known as a "front-end load", this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund. According to NASD rules, a front-end load cannot be higher than 8.5% of your investment.

Purchase Fee — another type of fee that some funds charge their shareholders when they buy shares. Unlike a front-end sales load, a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund's costs associated with the purchase.

Deferred Sales Charge (Load) — a fee you pay when you sell your shares. Also known as a "back-end load", this fee typically goes to the brokers that sell the fund's shares. The most common type of back-end sales load is the "contingent deferred sales load" (also known as a "CDSC" or "CDSL"). The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough.

Redemption Fee — another type of fee that some funds charge their shareholders when they sell or redeem shares. Unlike adeferred sales load, a redemption fee is paid to the fund (not to a broker) and is typically used to defray fund costs associated with a shareholder's redemption.

Exchange Fee — a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group or "family of funds".

Account fee — a fee that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount.

Annual Fund Operating Expenses

Management fees and operating expenses — fees that are paid out of fund assets to the fund's investment adviser for investment portfolio management, any other management fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category . But included such things as the manager's fees, legal and accounting fees, custodial fees and bookkeeping costs.

Distribution (and/or Service) Fees ("12b-1" Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

Other Expenses — expenses not included under "Management Fees" or "Distribution or Service (12b-1) Fees", such as any shareholder service expenses that are not already included in.

Total Annual Fund Operating Expenses ("Expense Ratio" or "Management Expense Ratio" - MER) — the line of the fee table that represents the total of all of a fund's annual fund operating expenses, expressed as a percentage of the fund's average net assets. Looking at the expense ratio can help you make comparisons among funds. For example, if a $100 million fund has $2 million in costs for the year its MER will be 2% to its investors.

A Word About "No-Load" Funds

Some funds call themselves "no-load". As the name implies, this means that the fund does not charge any type of sales load. But, as discussed above, not every type of shareholder fee is a "sales load". A no-load fund may charge fees that are not sales loads, such as purchase fees, redemption fees, exchange fees, and account fees. No-load funds will also have operating expenses.

Be sure to review carefully the fee tables of any funds you're considering, including no-load funds. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 — an 18% difference. A mutual fund cost calculator can help you understand the impact that many types of fees and expenses can have over time. It takes only minutes to compare the costs of different mutual funds.

Mutual funds bear some expenses similar to other companies. Though usually the major expense is the Management Fee paid to the fund manager, there are other expenses like Legal Fees, Audit Fees, Custodian Fees, and other fees that must be borne by the fund. There has been some criticism of Mutual Funds over the amount of expenses that eat into returns made by funds. This has led to disclosure of Management Expense Ratios (MERs). This essentially is a calculation of all the expenses of a fund divided by the average NAV for the year. In the first year of operations (where the reporting period may be ess than 365 days), MERs should be calculated based on expenses normalized for 365 days.

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