How these fees are calculated must be determined on a case-by-case basis. But here's an example of a common way they're calculated: a 1% sales charge load would result in a $1 fee for every $100 invested, leaving the investor with $99 worth of shares. Sometimes a deferred charge load is based on the initial share purchase amount instead of the fund's value at sale. Additionally, some deferred charge load or redemption fees gradually dissipate over time or disappear entirely if an investor holds a fund for long enough.
Some mutual funds are designated "no load" funds, which means that they have neither a sales charge load nor a deferred charge load. But these funds may still have redemption or purchase fees in place. To fully understand the fees that will be charged at purchase or sale, you must read about a fund's expenses in its prospectus.
Finally, some funds might be subject to an account maintenance fee, if there's some minimum balance threshold that an investment does not satisfy. These will generally be charged annually, as long as the fund's balance is below that threshold. The fees are often relatively small, like $20 per fund.
Fees You Pay Indirectly: Annual Fund Operating Expenses
Some investors may never realize that they're paying fees on their mutual funds indirectly, but most are. Operating expenses are generally withdrawn from a fund each day based on a fee set each year. The mutual fund industry reports operating expenses that investors must pay indirectly through a fund's expense ratio.
An expense ratio reflects the sum of all of a fund's operating expenses. If a fund's expense ratio is 1%, then that means an investor with an average annual balance of $100 would pay $1 in fees over the course of a year. Another way to think of how expensive these fees are is through a fund's annual return. For example, if a fund's average value rose by 5% in a given year but its expense ratio was 1%, then its net return is approximately 4%.
So what sorts of fees are included in an expense ratio? Here are some common examples:
- Management Fee (investment advisor expense)
- 12b-1 Fees (marketing expense)
- Other Expense Fees (administrative expense, legal expenses, accounting expenses, etc.)
For example, you might see a fund with an expense ratio of 0.7%, which consists of a 0.5% management fee and a 0.2% 12b-1 fee. Keep in mind that these annual expenses can add up over time, since they're assessed every year that you own the fund. This contrasts with the sales loads explained above, which are only charged once, at purchase or sale.
Why Some Funds' Fees Are Higher Than Others
How do you know if a mutual fund's fees are fair or not? Unfortunately, there's no easy way to make this determination, since all funds are different. Some might simply have lower costs, resulting in lower fees. For example, if a fund follows a major index and is not actively managed, then it will probably have a relatively low expense ratio. But if it's actively managed or has a special investment strategy, then it might have a fee on the higher end of the range.