All mutual fund types carry some fees and charges. Some of these costs are crystal clear while others are difficult to understand or see. Accordingly, it is important for those looking to invest in mutual funds to know that there are costs involved. Whether you can understand the mutual fund fees or not, it is for certain that you have to pay them. Take this article as a brief primer on all the mutual fund fees and expenses you may need to pay when purchasing mutual funds.
There are various mutual fund types with several different classes of shares to purchase. These include Class A, Class B, and Class C. Depending on the share class of the fund; there are different mutual fund fees. All share classes work with their own operating and management fees, most of which charge a 12b-1 fee.
Mutual Fund loads
These loads are actually mutual fund fees that investors need to pay when selling or purchasing certain types of mutual funds. Mainly, these loads are meant to pay a percentage to an advisor or broker for providing their services. In view of that, you should not pay any kind of mutual fund fees or loads unless you work with an advisor or broker.
There are three main types of mutual fund loads:
- Front-end loads – These fees are charged at the time of purchase with an average of 5 percent. Depending on the fund type, they can go as high as 8.5 percent.
- Back-end loads – These loads are also known Contingent Deferred Sales Charges or CDSC and are payable only when you sell your fund share. Initially, these loads can be 5 percent or more which usually reduces in several years until its amount reaches 0.
- Level loads – These charges are not charged at the time of sell & purchase. Instead, they work in an ongoing percentage level, such as 1.00 percent that is payable to mutual fund company by the investor.
Fees for Operating and Management of Mutual Funds
Each share class of mutual fund carries fees that are paid out of that fund’s assets to its investment adviser. A fund investment adviser’s responsibility is totally opposed to the person who sells the mutual fund. As an investor, you can take mutual fund fees as a reduction in your net profit against a cost on your bank or brokerage statement.
Mutual fund fees and expenses are greatly varied from fund type to type and may range from less than ten percent to more than 2.00 percent. It mainly depends on market capitalization, investment style, fund assets, share class and fund company of the mutual fund.
What are 12b-1 Fees?
It’s basically a SEC Rule of mutual fund fees that allows a fund to pay brokers fees for distribution and shareholder services so they are compensated for marketing and trading their mutual fund shares. According to Financial Industry Regulatory, the size of 12-1 fees is limited to 1.00 percent. Usually, an investor does not see these fees on their bank or brokerage statement since they are already deducted from the assets of the mutual fund they have invested in.
Class A Mutual Fund Shares Fees
Class A mutual fund shares include front-end sales charges, generally known as a “load” which is paid out to the fund adviser for purchasing mutual funds on the behalf of one or more investors. Even though, there are no SEC restrictions placed on the size of the sales loads fees being charged by a mutual fund, the FINRA has imposed a limitation of 8.5% for the same.
Here, it is important to note that you can avail divide discounts on these mutual fund fees if you buy a certain amount of the mutual fund. The same goes true if you buy a certain amount of diverse funds within the similar fund group. Like other fund types, Class A fund shares have investment fees that are paid to the mutual fund company for managing the funds’ investments. There are many shares in Class A which carry 12b-1fee, usually .25 percent, that is payable to the fund adviser for offering an ongoing service.
Class B Mutual Fund Shares Fees
Unlike Class A, Class B mutual fund shares do not involve any front-end sales fees. However, they do have a Contingent Deferred Sales Charge (also known as CDSC) as well as a higher 12b-1fee which commonly reaches 1 percent of the fund asset. The shareholders who want to sell their shares in the mutual funds before the surrender period are liable to pay the CDSC as a surrender charge. These fees are not paid to the adviser, instead, they are payable to the mutual fund company for covering its several costs including the upfront commission (usually 4 percent) payable to the adviser. As an investor, you do not see any of these fees including those upfront commissions being paid to different bodies.
The amount of the Contingent Deferred Sales Charge (CDSC) depends on how long you hold the share. The same can be read in diverse funds’ prospectus to have a clear idea of the aforesaid charges. There are several share funds in Class B that have a CDSC which is reduced to 0 percent in the sixth year and subsequently converts to a Class A in the seventh year. Once it is converted into a Class A fund share, it will have a lower 12b-1 fee and no surrender charges.
Class C Mutual Fund Shares Fees
When it comes to mutual fund fees for Class C shares, there is not upfront load but they do carry 1 percent of CDSC charge for one year. The shares in Class C also have 1 percent of a 12b-1fee. Unlike Class B, shares from this class do not convert into Class A shares so the 12b-1 fee remains the same.
No-Load Shares Fees
Mutual funds also include no-load shares that serve as the traditional clips of do-it-yourself investors. These shares are also meant to tailor to those advisers who charge an investment fee based on the fund asset. In general, no-load mutual shares carry lower management fees and do not have 12b-1fees or a sales charge.