In some respects, shopping for mutual funds is similar to shopping for a mortgage. Just as fees can add to the cost of carrying a mortgage, a whole slew of expenses can take away from the returns of a mutual fund. Fund companies do not have the ability to charge whatever they like as regulators keep certain fees capped to protect investors.
When a mutual fund uses a broker to shop its funds to prospective investors, it generally pays a commission to the broker. The fund company passes the expense onto mutual fund shareholders in the form of a sales load. Funds can add the fee to when you buy your shares or when you sell them, but the Financial Industry Regulatory Authority (FINRA) does not allow sales loads to total more than 8.5 percent.
Like any other business, mutual fund companies have overhead. The 12b-1 fees cover certain types of expenses fund companies incur, such as sales and marketing costs and employee bonuses. As the FINRA website notes, the agency caps 12b-1 fees at one percent of the assets you keep in a fund.
Some funds charge investors a fee when they sell some or all of their shares. Because mutual funds use redemption fees to pay different expenses than the ones sales loads cover, the Securities and Exchange Commission considers redemption fees a distinct expense. The SEC does not allow a fund to charge a redemption fee of greater than two percent. Often, funds levy redemption fees if you sell your shares before a certain period -- typically 90 days -- to discourage short-term trading.
Mutual funds can charge various other fees that are not regulated like sales loads, 12b-1 fees and redemption fees. For example, funds often charge management fees that go toward the portfolio manager's salary. They can also have additional fees to cover services provided to shareholders, such as automatic investing from a bank account that is linked to the mutual fund account. FINRA's fund analyzer, which is located on its website, allows you to assess the total expense ratio of a fund to determine if the fees charged are justified by the anticipated rate of return.