Mutual funds have costs to cover, so they have to charge fees. Some funds charge more than others. If a fund's performance is better than average, it's reasonable to be willing to pay higher fees. However, before you can evaluate a mutual fund's charges, you need to know how to decipher its fee structure.
Some mutual funds charge sales fees, called "loads." These are essentially commissions paid to a broker or other third party in exchange for marketing or promoting a fund. The Financial Industry Regulatory Authority limits sales loads to a maximum of 8.5 percent of the money you invest. "Front-end" loads are deducted directly from the dollars you put into a mutual fund account. Suppose you contribute $1,000. As much as $85 may go to pay a sales load, leaving only $915 that actually gets invested. Some funds charge the sales load when you redeem your shares. These "back-end" funds may reduce or eliminate the sales load if you hold your mutual fund shares for a specified period.
Other Shareholder Fees
Mutual funds that do not have sales charges are often called "no-load" funds. However, even no-load funds can charge shareholder fees that are taken out of an investor's money. These fees are not loads because the money is kept by the fund, not paid out to a third party. For example, redemption fees may be deducted when you cash in mutual fund shares. The Securities and Exchange Commission limits redemption fees to 2 percent of the value of the redeemed shares. Similarly, you can be hit with purchase fees and exchange fees for switching from one mutual fund to another offered by the same financial institution. You may also be charged an annual account fee.
Although not all funds charge shareholder fees, they all have fees to cover operating expenses. These are charged against fund assets, rather than individual shareholders. Management fees compensate investment professionals who direct the fund's securities transactions. Distribution fees cover shareholder services such as the transaction costs associated with paying dividends. Distribution charges are also called "12b-1" fees, after the SEC rule that regulates them. These fees are limited to a maximum of 0.75 percent of the fund's assets. Legal and accounting expenses may also be charged.
All mutual funds are required by the SEC to publish a complete listing of fees as part of the annual fund prospectus. Generally, a fund makes the prospectus available for download on its website. Another figure listed in the prospectus is the expense ratio. An expense ratio tells you what percentage of the fund's assets is used to pay operating expenses each year. The expense ratio does not include loads and other shareholder fees. Another resource you can use to calculate mutual fund expenses and compare different funds is the FINRA online Fund Analyzer. This tool, which contains information on more than 10,000 funds, is available on the website of the Financial Industry Regulatory Authority.