Mutual fund expenses are the costs involved in owning shares in a mutual fund. Some mutual funds make an effort to hide these costs, but they are important to know before choosing a fund in which to invest. These costs can significantly cut into investors’ profits, so it is a good idea to look for funds that have reasonable fees. Fees typically include both regular operating expenses and the costs associated with buying or selling shares in the fund.
Loads is the term used to describe fees associated with the purchase or sale of mutual funds. The term is just another name for commission, and not all mutual funds have these. There are two main types of loads, front-end and back-end. Front-end loads are paid out of the initial investment amount and reduce the amount of money available to buy shares in the fund. Back-end loads are paid after the fact if the shares are sold within a certain time frame. These normally decrease each year, so that eventually no payment is due. The average load varies greatly, but it is typically around 1 percent, according to the Investment Company Fact Book.
Operating Expense Basics
Operating expenses generally include all of the different costs associated with setting up and running a mutual fund. One such expense is the cost of the fund manager, the person who picks the assets in the fund and manages the fund to ensure it remains profitable. Another fund expense is the cost of administering the fund, which includes everything from postage to record keeping. A third area of operating expenses is the 12B-1 fee, which pays for broker’s commissions as well as for advertising and promoting the fund. Not all funds have all of these fees.
Operating Expense Averages
According to the 2011 Investment Company Institute’s Fact Book, while mutual funds can charge operating expenses that are fairly high, in reality investors typically paid fees no higher than about 0.84 percent as of 2010. The average amounts differ slightly between those funds that contain only stocks and those that contain only bonds, with the average expenses for a bond fund being slightly less than those for a stock fund, but still very close to 1.0 percent.
The average expenses for mutual funds have dropped significantly since the 1990s, mainly because more investors are choosing funds with low fees and no loads. With the ready availability of funds through work-related retirement plans, the competition for clients has prompted funds to eliminate or reduce fees as much as possible, especially for employees investing through work. The Investment Company Institute says that in the first decade of the 2000s, about 80 percent of all new investments went to the mutual funds with the lowest fees. The institute also says there is no correlation between higher fees and better fund performance.
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