Table of Contents
Chapter 1: Introduction to Mutual Funds
Chapter 2: Categories of Mutual Funds
Chapter 3: Understanding Mutual Fund Terminology
Chapter 4: Mutual Fund Costs
Chapter 5: Buying Mutual Funds
Chapter 6: Tracking and Selling Mutual Funds
Navigate This Page
Chapter 4: Mutual Fund Costs
– Transaction Fees
– Operating Costs
– Fund Management Fee
– 2b 1 Fees
– Expense Ratio
When you invest in a mutual fund, not all of your investment is converted into shares. Some of it is used to cover the costs of the fund. Different mutual funds come with different costs and you need to compare these before you invest in a fund. The fund’s costs will be listed in the prospectus which you will get along with the application form.
Transaction Fees (Load)
Any transactions that you conduct with your fund, like redemption, purchase or exchange, can attract a fee called ‘load’. The fee which will apply on these transactions is mentioned in the prospectus. Usually you can find these along with the account maintenance fees under the heading ‘share holder’s costs’.
There are other costs associated with managing the fund’s transactions on the whole but these are usually drawn out of the fund’s assets. These do add to your payout indirectly though you do not make specific payments towards these costs. The annual operating costs mentioned in the prospectus should give you an idea of how much the fund is spending.
The mutual fund is managed by a professional who has a lot of expertise in investing. The fund manager uses his knowledge and experience to manage the fund’s many investments. He needs to manage the fund to the best of his ability so that the projected returns can be achieved. The fund manager’s expertise and management activities come at a price, which is termed the fund management fee.
These are fees which pertain to ‘distribution’ expenses as authorized by the SEC. It includes advertising, marketing and selling expenses for the fund. The promotion costs including prospectus or sales material printing and mailing also fall into this category.
Other than these basic costs, there may be other costs which apply to specific funds. These costs influence your investment decision because they must be factored in the returns you gain from your investment. An online comparison of different funds will give you an idea of the average costs charged and help you compare the fund you want to invest in against this industry average.
The recurring expenses which are incurred on the fund are represented in the form of a ratio called the expense ratio. A high expense ratio fund, i.e. one which has larger expenses is not guaranteed to have better returns than a low expense ratio one. Investors must be wary of assuming that higher costs mean better management or assured returns.
Next Chapter: Buying Mutual Funds
