Q. Can you explain the various fees that mutual funds charge?
A. Virtually all fund fees fall into two categories: load and expense ratio. A load is a sales charge. Front-end loads are levied when you deposit money into a mutual fund, and back-end loads, also called redemption fees, are exacted when you withdraw money. A typical load is around 3.00%.
As an example, consider the Seligman Communications and Information Fund -- Class A. (Classes B and C have different fee structures.) This fund has a 4.75% front-end load. So if you plunk $10,000 into it, $475 will be deducted from your money upfront.
Loads exist to support sales efforts that bring more money into the fund and into the fund company coffers. If you work with a financial advisor, his compensation will come from the load. If you're a do-it-yourself investor, loaded funds aren't in your best interest, so Fools tend to favor no-load funds. These often fare better than load funds and have lower expense ratios, to boot.
With no-load funds, you just need to focus on the expense ratio. Chairs, computers, catered holiday parties, and other administrative costs that support the fund are included in this annual fee. Two of its components are often reported separately: 12b-1 and management fees. The 12b-1 fee is defined as covering marketing expenses, but it's essentially a continual load in the form of an annual sales charge. Management fees pay for fund manager salaries. The median total expense ratio is around 1.00% and the Seligman fund comes in at 1.44%. Included in the 1.44% is a 0.25% 12b-1 fee and a 0.86% management fee.
Index funds, which the Fool recommends for investors who want to invest in mutual funds, typically sport very low fees and outperform most other funds over the long term. The Vanguard Total Stock Market Index fund (ticker: VTSMX), for example, has no load and a piddly expense ratio of 0.20%. With a $10,000 investment, that amounts to just $20. Your money has a much better chance of growing, if 99.8% of it is left to grow.
Learn more about investing in mutual funds in our Mutual Fund area, and zero in on our index fund information there. And don't forget to drop in on our Mutual Funds discussion board, where folks talk about which funds they like and don't like, and why. (Full access to our boards costs a little money, but you can try them free for 30 days -- give them a whirl!)
If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.
This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
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