Mutual Fund Sales Charges
Investors that purchase mutual funds must make certain choices, including which funds to purchase and which class share is most advantageous. Each mutual fund has a specified investment strategy. You need to consider whether the mutual fund’s investment strategy is compatible with your investment objectives. Additionally, most mutual funds offer different share classes. Although each share class represents a similar interest in the mutual fund’s portfolio, the mutual fund will charge you different fees and expenses depending upon your choice of share class. As a general rule, Class A shares carry a “front-end” sales charge or “load” that is deducted from your investment at the time you buy fund shares. This sales charge is a percentage of your total purchase. As explained below, many mutual funds offer volume discounts to the front-end sales charge assessed on Class A shares at certain pre-determined levels of investment, which are called “breakpoint discounts.” In contrast, Class B and virtually all C shares do not carry any front-end sales charges. Instead, investors that purchase Class B or C shares pay asset-based sales charges, which may be higher than the charges associated with Class A shares. Investors that purchase Class B and C shares may also be required to pay a sales charge known as a contingent deferred sales charge when they sell their shares, depending upon the rules of the particular mutual fund. Liquidations of Class B or C shares immediately prior to the anniversary date of your purchase will result in a higher contingent deferred sales charge than liquidations made after the anniversary date.
Understanding Mutual Fund Fees
Fees are charged by all mutual funds. Over time, even a small difference in percentages can have a significant effect on the overall return. That’s why you should be aware of all the fees associated with any investment. Some fees are transaction based, while others are charged on an ongoing basis. The details of the types of fees you will be charged are described in detail in each fund’s prospectus. It is important to read the prospectus before you invest. Following are some of the types of fees, including internal product expenses, which are charged on an ongoing basis:
12b-1 fees. These fees are taken out of the fund’s assets to pay for the cost of marketing and selling the fund, for some shareholder services, and sometimes to pay employee bonuses. These fees are capped at 1% annually.
Management fees. These fees pay the fund’s portfolio manager and vary from fund to fund.
Other expenses. This miscellaneous category includes the costs of providing services to shareholders outside of the expenses which are covered by 12b-1 fees or portfolio management fees. You also pay transaction fees for the trades the fund makes, though this amount is not reported separately as the other fees are.
Other fees may be charged depending on the type or terms of a particular mutual fund, or characteristics unique to particular investors’ activity:
Redemption fees. Mutual funds are long term products and investors are discouraged from making very short-term trades. Funds often charge a redemption fee to investors who sell shares shortly after buying them. The redemption fee period can vary from just a few days to over a year depending on the fund. If you think you might need to sell your shares shortly after purchasing them it is important to thoroughly understand the fund’s redemption policy.
Exchange fees. Some funds also charge exchange fees for moving your money to another fund offered by the same fund company. So, you may incur an exchange fee if you move your money from one fund to another within the same fund company.
Account fees. Funds may charge you a fee for account maintenance. Particularly, if your account drops below an established dollar amount.
Purchase Fee. A purchase fee is another type of fee that some funds charge their shareholders when the shareholders purchase their shares. A purchase fee differs from, and is not considered to be, a front-end sales load because a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund’s costs associated with the purchase.
You can compare mutual fund fees by looking at the expense ratio, sometimes called the Total Annual Fund Operating Expenses. This represents the percentage of the fund’s total assets that goes toward paying its recurring fees every year. You can find this percentage in the prospectus, on the fund’s Web site, or in financial publications that evaluate mutual fund products. As mentioned earlier, with higher fees, it is more difficult for the fund to do better than the overall market as measured by the appropriate benchmark.
The Financial Industry Regulatory Authority (FINRA) provides an easy-to-use, online Fund Analyzer that allows you to compare expenses among funds-or among different share classes of the same fund. FINRA uses live data and captures expense information for thousands of funds. The analyzer can help you understand the impact fees have on your investment over time. Once you select up to three funds, type in the amount you plan to invest and how long you plan to keep the fund.
You should also be aware of transaction fees, which the mutual fund pays to a brokerage firm to execute its buy and sell orders. Those fees are not included in the expense ratio, but are subtracted before the fund’s return is calculated. The more the fund buys and sells in its portfolio, which is reported as its turnover rate, the higher its transaction costs may be.