If you're going to invest in mutual funds, you'd better understand what kinds of fees they charge.
Virtually all fund fees fall into one of two categories: load and expense ratio. A load is a one-time 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 make a withdrawal. A typical load is around 3%. As an example, consider the Seligman Communications and Information Fund -- Class A
Loads exist to support aggressive sales efforts that bring more money into the fund and into its company's coffers. Therefore, loads usually aren't in an investor's best interest. As a result, 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 need to focus on just the expense ratio. Chairs, computers, catered holiday parties, and administrative costs that support the fund are included in this annual fee. Two of the no-load's 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, meanwhile, pay fund managers' salaries. The median total expense ratio is around 1%. The Seligman fund comes in at 1.51%, which includes a 0.25% 12b-1 fee and a 0.84% management fee.
Index funds, which the Fool recommends for people who want to invest in mutual funds, typically sport very low fees and outperform most other funds. The Vanguard Total Stock Market Index fund
Learn more about investing in mutual funds by visiting our Mutual Fund area, and zero in on our index fund information there.
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