Virtually all fund fees fall into two categories: loads and expense ratios. A load is a onetime 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%. As an example, consider the Seligman Communications and Information Fund -- Class A. (Classes B, C, and D 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 up-front.
Loads exist to support sales efforts that bring more money into the fund and into the fund company coffers. This isn't usually in your best interest as an investor, 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 fees 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 for funds is around 1.00% and tops 1.5% for stock mutual funds. The Seligman fund comes in at 1.59%. Included in the 1.59% is a 0.25% 12b-1 fee and a 0.90% management fee (up from 0.86% several years ago).
Index funds, which attempt to match the performance of the overall stock market, typically sport very low fees and outperform most other funds. The Vanguard Total Stock Market Index fund (VTSMX), for example, has no load and a piddly expense ratio of 0.18% (down from 0.20% a few years ago). With a $10,000 investment, that amounts to just $18. 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. And to learn about low-cost funds with excellent prospects (and ethics), check out Motley Fool Champion Funds.
