Your Guide to Mutual Fund Fees

Investing in Mutual Funds Comes With a Cost

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Investing in mutual funds can come at a cost, and it's not just what you pay for shares in the fund. There are several types of fees and expenses that investors bear.

Mutual fund fees can be an important factor when comparing and deciding which funds to invest in. When analyzing fees, you should look out not only for high or low fees but also when they are charged and how the fees are collected. These fees also may impact the returns on your initial investment.

While some mutual fund fees can be pretty straightforward, some may be hidden, which means investors may not necessarily understand what they’re paying for.

Here’s a look at the different types of fees that mutual funds and ETFs may charge and how they can impact your investments in the funds.

Why Are Mutual Fund Fees Important?

Mutual fund companies incur costs of operating a fund, marketing it and paying intermediaries to sell the funds, among others. Such costs are passed on to the fund investors in the form of fees.

The more investors pay in mutual fund fees, the less money they have in their investment portfolio. As a result, if two funds are identical except for their fees, the fund with lower fees will outperform the fund with higher fees.

The fee structure of a fund can help you understand how much you’re paying and what you’re paying for through the fees. It can also help you compare funds. 

Some funds may charge what is considered a high fee, while others may have lower fees. Some fees are paid upfront when investors purchase shares of mutual funds while others could be paid out from the net assets of the fund. Some fees are one-off while others are recurring. Different share classes of the same mutual fund can charge a different fee structure to investors, too.

A mutual fund is required to disclose the fees it charges in the prospectus which can be found on the fund’s website. 

Investors need to pay mutual fund fees irrespective of the fund’s performance, which means investors need to pay money even if the fund has negative returns.

Types of Mutual Fund Fees

Fees make a nice filter for organizing mutual funds you might want to invest in. Generally speaking, you’ll find two categories of fees: annual operating expenses and shareholder fees. 

Operating expenses are not necessarily associated with a particular investor but have more to do with the costs of running the fund. Some funds charge individual investors for their transactions or services the fund offers to them through shareholder fees.

It’s important to assess fees because, as with the old days of paying commission to buy and sell stocks, mutual fund fees can hurt your overall investment return. 

Annual Operating Expenses

Let’s consider the most common operating expenses you’ll find associated with mutual funds. 

Expense Ratio

An expense ratio captures many of the administrative costs incurred by companies that manage mutual funds. 

An expense ratio is simply the annual operating expenses of a fund, displayed as a percentage of a fund’s net assets. ETFs tend to have lower expense ratios. For example, Vanguard boasts an average expense ratio of 0.10%. For most mutual funds, expense ratios tend to range from 0.25% to up to 1.5% but rarely significantly higher than that.

Unless you have specific reasons to invest in a particular mutual fund, it’s generally a good idea to stick with lower expense ratios, such as in the 0.25% to 0.75% range. 

Even a small difference in a fund’s expense ratio can have a big impact on your total return on investment. For example, assuming a 5% annual rate of return on a $10,000 investment in a mutual fund with annual operating expenses of 1.5%, you would end up with approximately $19,898 after 20 years, paying over $6,000 in fees during that time. 

Lower the expense ratio to 0.5% and you finish the 20-year period with about $24,117, which represents a difference of more than $4,000 in returns, and you’d only pay about $2,416 in fees.   

12b-1 Fees

Fund companies charge 12b-1 fees to investors to cover their expenses associated with things like marketing and compensating intermediaries like brokers for selling the fund. This charge doesn’t appear on your statement but is directly paid out of the fund’s net assets.

The Financial Industry Regulatory Authority (FINRA), a self-regulator for brokers, caps 12b-1 fees at 1% of a fund’s net assets. 

Management Fees

It takes a team to run a mutual fund, led, most often, by one or more direct fund managers. These portfolio managers and staff need to get paid, thus mutual fund shareholders will typically incur a management fee. 

Passive index-based mutual funds typically have lower fees and expenses than actively managed funds.

Shareholder Fees

While all fees are important, you might pay slightly closer attention to a mutual fund’s shareholder fees, as they can vary a bit more widely. 

Sales Load Fees

You should watch out for funds that charge front-end or back-end sales loads.

  • Front-end sales loads: You pay this fee when you buy shares of a mutual fund that charges such a fee. For example, if you invest $1,000 in a mutual fund with a 3% front-end sales load fee, the load would be $30 (3% of $1,000) but more importantly, the amount of money you actually end up investing or buying shares with is then $970. 
  • Back-end sales loads: Separate from any redemption fees (more on those below), you pay a back-end sales load (if a fund charges one) when you sell shares of a mutual fund. The sales load gets deducted from your withdrawal amount. 

FINRA regulates sales loads, capping both types at 8.5%. Brokers receive sales loads as a type of commission for the work they do helping you pick a mutual fund. In order to avoid paying loads, you may want to consider no-load funds.

Some funds characterize themselves as “no-load” funds that do not charge any sales load. However, they may still charge other types of fees.

Purchase Fees

Purchase fees are pretty straightforward. For the right to buy a share of a mutual fund, you pay a fee. Purchase fees are distinct from the remaining fees we’ll cover. 

Redemption Fees

When you sell shares, some mutual funds charge a redemption fee. The fund collects these fees directly to offset costs associated with you selling your shares. As mandated by the Securities and Exchange Commission (SEC), you typically will not pay more than 2% of your sales proceeds for a redemption fee. 

Account Fees

Some firms charge account fees to defray costs associated with maintaining your mutual fund account. You might see this charge if your account balance sits below any fund-imposed minimum. 

For example, Vanguard waives account fees if you meet certain conditions or have at least $50,000 in assets with Vanguard funds. If not, it imposes an annual $20 charge for each account that has less than $10,000 balance.

Exchange Fees

If you decide to swap one mutual fund for another within the same family of funds, you might pay an exchange fee. 

You can take a look at each of the above fees one-by-one, in both categories. And you probably should. However, if you want a one-stop shop for fee assessment, simply go back to the expense ratio to get a good handle of how much fees will eat away at your investment returns. 

How Do Fees Differ for Different Mutual Fund Share Classes?

When you research mutual funds, you’ll likely come across different classes of shares. Simply put, these classifications group some of the fees, particularly loads, we have outlined. 

Class A Shares

This class of shares charges a front-end sales load, most often between 2% and 5% of your investment. To reiterate, you pay this load when you purchase shares. The fund deducts it from your initial investment amount. 

Class B Shares

Mutual fund Class B shares impose a back-end sales load. Generally speaking, the fund will decrease this charge annually until it goes away completely, usually after seven years, though this is not set in stone. Again, when you sell the fund you’ll pay this load as a percentage of your proceeds. 

Class C Shares

As FINRA notes, this class of shares might charge a “level load.” The fund will collect this fee annually. It might opt to just charge a back-end sales load. Class C fees tend to be inline with those of Class B and higher than Class A. 

You can use the FINRA Fund Analyzer, a tool that lets investors search the universe of mutual funds to determine the impact of fees on their investments. All you need is the name of the fund. 

For example, consider the AIG Multi-Asset Allocation Fund which offers Class A, Class B, and Class C shares. Let’s say you invested $10,000, with a 5% annual return for a period of 10 years. All else equal, the growth of that investment could look like this in each one of the classes, based on the different annual expense ratios:

Share Class Annual Expense Ratio Fees Paid Over 10 Years Return on Investment After 10 Years, After Fees
Class A Shares 1.54% $2,237.38 $14,051.57
Class B Shares 2.32% $3,261.52 $13,027.23
Class C Shares 2.28% $3,210.69 $13,078.26

The table above is a simple example. In reality, each class of shares charges additional fees.

AIG Multi-Asset Allocation Fund Class A Shares charge a front-end sales load that ranges from 0% to 5.75% depending on the investment amount in the fund. An investment of $100,000 or more attracts no front load while any investment less than $50,000 would require 5.75%.

Since the front load is taken out of your investment, if wanted to invest $10,000 in Class A shares, you’d have to start with about $10,610 before paying the 5.75% fee, or $610 ($10,610 - $610 = $10,000).

Some mutual funds offer breakpoints, which means that the fund will reduce its front end-sales load by a certain amount as your initial investment in the fund increases.

Both Class B and Class C Shares of the fund charge a back-end sales load. For Class B Shares, the back-end load fee is 4% if the shares are sold within the first 24 months, but it gradually reduces to 0% over a period of six years. For Class C Shares, shares sold within one year attract a 1% back-end sales load but there’s no load for shares held longer than that.

Key Takeaways

  • To quickly assess a mutual fund’s fee structure, look to its expense ratio. 
  • Passive index-based mutual funds may have lower expenses compared to actively managed funds.
  • Different mutual fund share classes may have different fees and expense structures.
  • Beware of sales load charges, which a mutual fund can charge when you buy or sell shares. 
  • No-load mutual funds may not charge sales loads but may have other expenses.