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Many sellers of mutual funds tout them as “no load”. No load
means that there is no sales charge paid to a broker. Investors may mistakenly
believe that there won’t be any fees associated with owning the fund. But,
loads are only part of the story as far as charges go. The key point to
remember is that everyone wants to get paid, and your money is the source of
that payment. The following fees are generally expressed as a percentage of
your investment balance. For example, if
you have $10,000 invested in a mutual fund and there is a 1.5% Annual Expense fee
associated with it, you’ll be charged $150 every year. $100,000 translates to $1500
in fees, etc. Here are some examples of fees charged by mutual funds that you
may not be aware of.
1)
Redemption Fee – not considered a sales load
even though it is deducted from redemption proceeds, just like a sales load.
2)
Exchange Fee – If you transfer from one fund to
another you might be charged this fee.
3)
Account Fee – A type of maintenance fee that
might be charged if your account drops below a certain dollar value.
4)
Purchase Fee - Some funds charge this fee when
you buy their shares. It is not considered a load because it is paid to the fund
instead of to the broker. That’s right,
they are charging you for buying their fund.
5)
Management Fee – This fee is paid to the fund’s
investment advisor for managing the fund’s portfolio.
6)
Distribution (12b-1) Fees – Used to market the
fund to other investors and pay brokers for selling shares of the fund.
7)
Other Expenses – If fees aren’t included in the Management Fees or Distribution Fees categories, they are included here. Examples are
custodial, legal, accounting, transfer agent, and custodial expenses.
As you’ve seen, sales loads are just one of 8 potential fees
associated with a mutual fund. Mutual funds are required to list these fees in
the Fund Prospectus. The Load plus the first
three fees are considered Shareholder
Fees and are listed under that heading in the prospectus. Fees 4 through 7
are considered Annual Operating Expenses,
and appear under that heading in the prospectus. As the title suggests,
they are recurring charges.Mutual funds will list a Total Annual Operating Expenses item. Although this helps in identifying a part of the expenses, it only includes the annual operating expenses (items 5, 6, and 7). As an alternative to digging through the fund prospectus, you might want to use the Morningstar.com website. Morningstar not only provides expense information, but rates the funds and provides historical yield information in addition to other important information.
The actual fees charges by mutual funds vary
considerably. I’ve seen the Annual
Operating Expenses range from 0.01% to over 2.5%. If you think that all of the
funds charging 2.5% have higher yields than all of those charging 0.01%, you’re
wrong. Generally, fees are based on how actively the fund
is managed. So a fund that is doing a lot of trading will generally be more
expensive to own than a fund that just tracks an index like the S&P 500. Ironically,
index funds tend to outperform the more actively managed funds and are
generally less expensive to own.
Brycast provides investment advice, as well as financial
planning and income tax services. If you would like help setting up a new
portfolio, or evaluating a current portfolio please contact us at (512)
293-4170 or via email to norman@brycast.com. Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
