One of the criteria for selection of a mutual fund is the fees that are charged. Below is a description of common mutual fund costs.
·Front-End Loads or Sales Charges--These can range from 0 to 8.5 percent. This commission fee is paid for the initial purchase of a mutual fund investment. The broker or financial advisor who selects and sells you the fund may receive a portion of this fee.
·Back-End Loads, Redemption Fees, or Exit Fees--These can range from 0 to 6 percent. Some funds charge when you sell fund shares soon after purchase. These loads will typically decline with each year that you own the fund and disappear after you own it for a number of years.
·12b-1 or Marketing Fees--These can range from 0 to 1 percent. The U.S. Securities and Exchange Commission allows mutual funds to charge what is known as a 12b-1 fee to cover marketing and distribution costs. These fees are taken from a fund's assets each year.
·Management and Administrative Fees--These can range from .2 to 2.5 percent. All funds charge investors a management or administration fee that is a percentage of total fund assets.
A mutual fund prospectus will list all of a mutual fund's operating expenses. It will also include a fee table with an example showing how much of your investment goes to expenses over one, three, five, and ten years. Each illustration assumes a $10,000 investment and a 5 percent return each year and that you sell your shares at the end of the time period. This allows you to compare funds with different fees to determine how much these expenses will cost you.
Over the long run, mutual fund fees add up, so look for funds with low expenses. All things being equal, low-cost funds will net you higher returns than high-cost funds. Both no-load and load funds charge annual money management and administrative fees. These costs are a percentage of the assets in the portfolio. These costs, in addition to the 12b-1 fee, make up a fund's expense ratio (expenses as a percentage of fund assets). Beware of funds with expense ratios greater than 1.4% for stock funds, 1% for bond funds, and 0.5% for money market funds.
For further information about mutual fund investing, check out the Rutgers Cooperative Extension basic investing course, Investing For Your Future. The course is available online at www.investing.rutgers.edu. Print copies can also be obtained from your local Rutgers Cooperative Extension office for $15.