The last tip in the Personal Finance Series revolved around Retirement Accounts. This article, written by the same knowledgeable guest writer, will discuss the popularly encountered but rarely understood world of mutual fund fees.
If you have any questions or comments concerning mutual fund fees, please leave a comment or send an email to seeminglyuseless@gmail.comMost people attain exposure to the stock market via mutual funds, defined as a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. However, with well over 8,000 mutual funds that exist today (http://www.ici.org), how do you know which fund to invest in?
No two mutual funds are the same and not every mutual fund will invest according to their published investment objective. Also, and most importantly, some have a string of fees that will make a huge difference in your net return especially during recessionary times like today. Therefore it is critical to understand the fees involved before you make any mutual fund investments.
For example, you might notice the following fee:
Sales load- This is a fee that is used to pay brokers that promote a specific fund. It can be either a front load or back load fee and is usually 5% of your investment. For example, if a fund has a 5% front load, and you decide to invest $100 into the fund, then you will pay $5 (or 5%) immediately and your initial investment would be $95 instead. Your net return must exceed 5.3% ($5/$95) in order to break even. Back-load fees just mean the fee is taken when you redeem your shares. If your investment has done well then the fee would clearly be higher.
Many funds are considered no-load funds but there are also a number of non-load fees involved. Some include:
Redemption Fees- Some funds charge a fee when you redeem your shares, which are not considered back load fees because the fee is paid to the fund, not the broker. The SEC has limited the max redemption fee charged to be 2%. Some funds also charge a redemption fee when you buy and sell within a short term time frame (i.e. 60 days).
Exchange Fees- Some funds charge a fee when you exchange one fund for another within the same family.
Account Fees- Some funds charge a fee that will be used for the maintenance of accounts.
Purchase Fees- This is the same as a front load fee, except the charge goes to the fund, not the broker.
Finally, you will probably find the following fees with every fund you purchase:
Management Fees- The fee charged to pay the professional(s) for managing your assets and making the investment decisions.
Distribution Fees (aka 12b-1 fees) - Fees charged to cover distribution expenses (i.e. marketing, printing, etc).
The above sounds quite expensive and you may end up in the red for a long time if the wrong fund is chosen. Thus, be sure to review the “net expense ratio” which will tally all the fees involved. From my experience, the average expense ratio for equity mutual funds has been around 1-1.5%. Anything higher would be relatively expensive. Further, bond fund expense ratios are typically lower.
Here are some tips that will help you learn and understand more about mutual fund fees:
- Use websites such as www.morningstar.com to learn about funds. All you need to do is to type in the fund ticker and not only will you find out the fund fees but you will also learn interesting facts about what your fund is invested in.
- Read the prospectus for your mutual fund. If you are dealing with a broker, ask him/her to provide one.
- You can also Google the fund name and look for the prospectus through the fund’s website. The actual prospectus could be thick (don’t be discouraged) but understanding the facts will make you a smarter investor!
- Finally, you can reach out to the fund’s customer service department and have them explain what fees are involved. The phone number is almost always on the fund’s website.
Final thoughts: During bull markets, most investments go up and people focus less attention on the fees they pay. However, when times are rough (and believe me, the stock market does not look pretty right now), it is extremely critical to be saving every extra penny that you can. Therefore, do your due diligence correctly and make smarter choices about mutual fund investing today!
Useful Websites:
Morningstar.com
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