Mutual Fund Expenses

Mutual Fund Expenses

Types of mutual fund expenses

Sales loads

Pros and cons of paying sales loads

Loads that should be avoided

The effect of expenses on returns

Types of mutual fund expenses

Management fee

• Charged by all funds
• Covers legal, accounting, mailing expenses and profits for management company
• Typically about 1 percent annually of money under management

12b-1 fees

• Charged by about half of all funds
• A fee charged to pay for advertising to increase size of the fund
• Typically 0.5 percent annually of money under management

Sales loads

• Charged by about half of all funds
• Commission paid to compensate an advisor for helping you select funds
• Typically 5 percent of the amount of money invested

Sales loads

Front-end loads are paid when you enter the fund

Back-end loads are paid when you exit the fund

Back-end loads may taper off after a few years

Different classes of shares have different loads

• Class A shares typically have front-end loads
• Class B shares typically have back-end loads
• Class C shares have no load but higher on-going expenses

Pros and cons of paying sales loads

Pros

• If you want advice, you'll have to pay for it some how
• Loads are one way to pay for advice
• Fee-based only advisors are another way to get advice

Cons

• You don't have to pay loads -- there are plenty of good no-load funds
• Do your own research and save $500 on a $10,000 investment
• There is no evidence that load funds outperform no-loads

After taking the load into account, no-loads outperform load funds

Don't let a load fund salesperson tell you otherwise

When you pay a load, you're paying for the broker's help in selecting a fund, not for superior returns or service

Loads that should be avoided

It's one thing to pay for advice

But try to avoid funds that levy a load on reinvested dividends

This is an absolutely unnecessary expense!

The effect of expenses on returns

Cutting your annual expenses from 1.5 percent to 0.5 percent may sound like chump change

But cutting your after-expense yield from 7 to 6 percent increases your income by 14 percent

Remember, because of compounding, slightly increasing your return on investment can lead to much greater wealth over time so slightly reducing expenses can lead to much greater wealth

Higher expenses may entail greater risk

Which is better?

Investing in a thrifty US Treasury bond fund with a pre-expense yield of 6.5 percent and a post-expense yield of 6 percent

Or investing in an expensive junk bond fund with a pre-expense yield of 8.5 percent and a post-expense yield of 6 percent?

Fund type	Securities	Yield	Management fee	After-expense yield to you
Thrifty fund	US Treasury bonds	6.5%	0.5%	6.0%
Expensive fund	Junk bonds	8.5	2.5	6.0