When you decided to opt for mutual funds, you should also understand all mutual funds come with some fees, and depends on the type of mutual funds. Below we will discuss few types of mutual funds fees which you should ask for before opting for it & all about knowing your mutual fund fees.
Fees in The Form of Expense Ratio - Every Mutual Fund Comes With This Ongoing Fee
When you have planned to opt for mutual funds, then some fee is required to exercise these mutual funds. All of the mutual funds have this type of fee called - 'Expense Ratio' it is also known as management fee or operating expense.
The fee is calculated keeping n mind the total asset value of the funds and much before the share price is determined.
If you own a mutual fund which is valued at $20 per share and it has a total return of 10%, which means it is providing you total investment return of $2.00 per share.
If there are not any fees then fund share will have the value of $22, and fund manager will deduct about 1% of fees, and this means the total investment return you will be getting is $1.78 and not $2.00, and after paying fund fee your share value will be $21.78.
The following general rules are being applied to mutual fund fees:
- Funds which are being managed actively have higher operating expenses in comparison with passive funds or index funds. It is so because actively managed funds are always in search of best securities which you can have. These searches are costly, but statistically, you don't get what you are paying for.
- Small caps funds come with higher fees as comparing them with large caps funds. It will cost you more to buy & sell small caps and this higher cost translated into higher fees or expense ratio for the small caps.
- International funds to have higher fees in comparison with domestic ones. So, if you are trading outside the country or internationally, you will have to bear the higher costs, and these costs are passed in the form of higher expense ratios.
- Funds which are managed passively or index funds usually have low fees, and when you opt for these type of funds, it will surely perform well as funds in the future.
When you start comparing fees of various funds, you can follow the above guidelines, so while comparing the U.S large caps funds with any other funds of another country, you should understand international funds comes with higher costs.
Sales Charges or Commission - Direct Form of Fee
When you opted for 'A Share' mutual fund, the fee is being paid in the form of commission on the purchase of shares. This form of fee is also referred as a sales charge or 'front-end load' so funds having 'no-load' means no upfront fees.
If your total investment exceeds a threshold amount in front-end load fund & at the same time you have decided to invest in the same type of funds, then you are qualified for 'break point' or lower upfront fee.
Let's assume that you have purchased a fund having the value of $20 per share and is having about 5% of front-end sales charges or load.
In this case, you need to pay about $21.04 for every share you have purchased an extra 5% will also be added to the basic value of the shares. Most of the financial salespeople get paid by this method.
The fee in The Form of Redemption - Fee on Every Sale
If you have opted to buy 'B-Shares' mutual fund and when you sell the fund within the predefined time frame you will have to the redemption fee which is also sometimes called 'back-end load' and in easy terms known as sales charge or a surrender charge.
Let's assume you have opted for fund worth $20 per share and having 5% of contingent deferred sales charge. If within a year you made up your mind to sell it then you will get $19 per share and with each consecutive years these fee use to go down.
If you own the B funds, share and hold it as per the specified time or fund's schedule then surrender charges will not be incurred upon you when you sell them.
Fees For Short-Term Trading
Usually, mutual funds are meant for long-term trading or investments and designed accordingly, and when you opted to sell them in a short period then you will be incurred with short-term trading fees, and this is also done to discourage the investors from trading it within a short period.
In your 401(k) account all the mutual funds are subject to short-term trading fees.
Usually, the short period is considered when you opted to sell the mutual funds within 30-90 days of their purchase. And about 1-3% percent of mutual funds fees will be incurred upon you for selling the funds within a short period of purchase.
Service or Distribution Fee - 12(b)1 Fee
Most of the funds are having ongoing marketing or service fee, which is also known as 12(b)1 fee. This fee is being paid to your financial advisor or financial service company for the compensation for marketing your fund.
If you purchase or have opted for a 'C Share' mutual fund, it will also have an extra 12(b) fee as well as the expense ratio.
And the fee can be deducted in the same way as the expense ratio is being deducted, means the fee will be deducted from the total value of the fund asset before share value is being determined.
Let's assume you have a C Share which is valued at about $20 per share, and the gross return it giving to you in a year is 10%, that means $2.00 was the total return on the investment per share.
1% is being deducted by the fund manager, which lands you up with the actual return which is $1.78 and not the full $2.00.