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Mutual Fund Fees and Expenses
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Mutual Fund Fees and Expenses
By: Suzanne Lako
The Henssler Financial Group Position Paper | |
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In
previous articles, I have outlined the basics of mutual funds, as well as the
different types of funds. In this article, I will outline some of the various
expenses associated with mutual funds.
Mutual
funds incur costs that must be paid from fund assets. These costs are incurred
through marketing, advisory fees, accountants' fees, legal fees, custodial fees,
etc. Simple transactions such as buying, selling and exchanging shares can be
costly for mutual fund companies as well. The investor is the one who inevitably
pays for these costs.
Fees
imposed on the "transaction" are charged directly to the investor as a "load,"
while operating expenses are paid from the fund assets. Therefore, ultimately
the various costs a mutual fund investor incurs come either directly or indirectly
from the investor's pocket.
Listed
below are the major fees associated with mutual funds. These are in no particular
order and can be costs of transactions, or fees charged to make up for normal
operating expenses.
Sales Charge (Load):
This is a fee charged to compensate brokers the fund uses to sell its shares.
There are two types of loads, front-end and back-end:
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Front-End Load: This is a sales charge
that is applied at the time of an initial purchase. This charge reduces the amount
that is available to purchase shares. A front-end load is paid completely at the
time shares are purchased.
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Back-End Load: This is a sales charge
that is applied when fund shares are redeemed. This is also known as a deferred
sales charge. When purchasing a back-end loaded fund, all of the initial investment
is used to purchase fund shares. These back-end loads are calculated one of two
ways. In some funds, the back-end load is based on the lesser of the initial purchase,
or the value of the investment at the time of redemption. In other cases, the
load is referred to as a contingent deferred sales load, in which case the fee
usually decreases each year the investor retains the shares, and is eventually
eliminated.
12b-1 Fee:
A fee assessed
to shareholders for some of a fund's promotional (marketing and distribution)
expenses.
Account Fee:
A fee
that some mutual fund companies charge to help maintain shareholder accounts.
Exchange Fee:
A fee
charged by some mutual fund companies when a shareholder transfers from one fund
to another within the same family of funds.
Management Fee:
A
fee that is paid from fund assets to the investment adviser for management of
the fund.
Purchase Fee:
A fee
charged when shares of a fund are purchased. This is not the same as front-end
sales load, because the fee goes to the fund, not the broker.
Redemption Fee:
A
fee charged when a shareholder sells shares in a short period of time. The time
limit varies among funds. Some funds charge a percentage, and some charge a flat
dollar amount. The SEC generally limits this fee.
A note regarding
"no-load" mutual funds — these funds are sometimes referred to as "free"
funds, since there are no loads associated with them. However, just because a
fund is a no-load fund does not mean that it is free. No-load simply means that
there are no sales charges or loads as described above under Sales Charges (Loads).
In reality, no-load mutual funds are permitted to charge fees such as redemption,
exchange, account, and purchase fees. A fund can call itself a no-load fund as
long as its 12b-1 fee and/or shareholder fees do not exceed a certain percentage
of the fund's average annual net assets. Share
Classifications As discussed
earlier, when mutual fund shares are purchased through a broker, a sales charge
is usually assessed. This charge is paid differently based on the class of shares
purchased. Below are the three main types of mutual share classifications.
Class A Shares:
Generally,
expenses are lower on this share type than on B and C shares. Class A shares typically
charge a front-end load, annual expenses, and usually include a 12b-1 fee. Because
these shares are said to be the cheaper shares, investors who are in the market
for the long-term usually prefer these shares.
Class B Shares:
Expenses
on these shares usually consist of a back-end load, and annual expenses. The back-end
charges usually decrease the longer the shares are held, but typically, the annual
expenses are greater on B shares than on A shares. If an investor holds B shares
long enough for the back-end load to be eliminated, the shares will convert to
A shares, so the lower expenses of A shares take effect.
Class C Shares:
These
shares do not charge loads, but typically have higher expenses than A shares.
These shares do not convert to A shares. Therefore, if an investor has a long-term
time horizon, it is typically not a good idea to invest in these shares, as higher
expenses will probably be incurred. These shares are more appropriate for an investor
who has a short time horizon for holding the shares.
Our Approach At
The Henssler Financial Group, our investment philosophy states that if you have
less than $50,000 to invest, mutual funds are a more viable option to help you
formulate a well-diversified portfolio. We generally avoid load funds, as in most
cases no-load funds are available to provide the investor with a similar investment
mix without sales charges.
It is important that an investor consider
all fees and charges when purchasing a mutual fund. Some no-load funds have a
considerably higher expense ratio than others. Small Cap, Mid-Cap and international
stock funds usually have higher expense ratios than Large Cap stock funds, as
research on the companies in which these funds normally invest is more difficult
to find and evaluate. Remember that all funds, even money market funds, have expenses
associated with them.
Morningstar (either
a printed version or on the web) is a valuable source of information on the various
fees, expenses and sales charges associated with different mutual funds. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. | | | |
©2008 The Henssler Financial Group | www.henssler.com
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