Mutual Fund Fees Explained

A mutual fund is a managed investment that is set up and maintained by professionals. The professionals that manage mutual funds make their money by charging a variety of fees to fund investors. The fees are added to the cost of the fund and passed onto the investors.

An investor has to pay close attention to these fees because they can significantly increase the cost of the fund and eat up investment gains. All of the fees will be listed in the prospectus which anybody selling mutual funds is required to give you by SEC regulations. Fund prospectuses should also be available online at the fund company's website. A careful reading of the prospectus can tell what the fees are and how much you will pay. There are several different mutual fund fees you will have to watch out for including:

The Expense Ratio
The expense ratio is the total cost of the fees charged to administer the fund. It is usually represented as a percentage of the money in the fund. The expense ratio indicates a percentage of the money in the fund that the investor will not receive. If you can determine what the expense ratio is you can determine the cost of operating the fund and use it to determine what your investment gains will be. A mutual fund analyzer can tell you what the expense ratio for most funds will be.

The expense ratio is usually composed of the investment advisory or management fee, the distribution fee and the administrative costs. Adding these up will give you the percentage you'll pay for the operation of the fund.

Fees that Make up the Expense Ratio
The investment advisory or management charge is a percentage of the funds' assets used to pay the investment professional that manages it. It is usually between.5% and 1% of the fund's value.

The administrative costs are the percentage of the fund taken out to pay for the operation of the mutual fund company. In a good fund this fee should be around.20% but it can be higher. If it is higher, be leery because part of your investment could be paying for the fund company's fancy building and its CEO's private jet rather than your retirement.

The distribution fee or 12b-1 distribution fee is used to pay for the marketing and sales of the fund. This goes for advertising and for commissions to salesmen and brokers that move shares. It can range from.25% to 1% of the assets.

Load and No-Load Funds
You will not be able to avoid paying the charges that make up the expense ratio but there is another higher fund fee you can avoid. This is called the load fee and it is charged when you purchase shares. An equity or stock mutual fund can have a load fee as high as 5.75% so somebody who purchased $1,000 worth of those shares would pay a fee of $57.50.

Fortunately this can be easily avoided by purchasing no-load mutual funds which do not charge those fees. These instruments are called no-load mutual funds and most financial professionals have them available. You can spot load fees or front loads by reading the prospectus. By carefully examining prospectuses you should be able to find funds that meet your needs and will not charge high fees.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about finance topics like annuities, insurance, investment, and retirement.