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Anytime you buy mutual fund shares you need to consider fees. The costs of buying, maintaining and selling can chip away at what you own and, consequently, what you earn. Many funds have reduced certain expenses while increasing others that are less noticeable. There are several types of fees covering the maintenance of funds and the costs of doing business with investors. A prospectus lists all the fees charged by the fund.
We will cover the three most common fees and then several lesser-known ones grouped together under "Other Fees":
SALES
CHARGES
Sales charges are the fees one may pay when purchasing or redeeming
shares of a mutual fund. These funds have other fees and may even
charge fees for redeeming shares. By law, sales charges may not
exceed 8.5 percent of the amount invested. Competition among funds,
however, has led many funds to lower their sales charges or even
to eliminate them. Funds with no sales charge are called no-load
funds.
Load funds have a sales charge when shares are purchased (front-end
load) or when redeemed (back-end load). Back-end loads
will be discussed later. To illustrate a front-end load, an individual
investing $1,000 in a load mutual fund with a front-end sales load
of 8.5 percent pays $85 in sales charges and $915 to purchase actual
shares. A fund may pass a portion of the sales charges on to brokers as compensation.
Back-end load funds have a sales charge assessed upon the
sale of shares. Other names for these charges are deferred sales
loads and contingent deferred sales charges (CDSC). The fund will
normally pay compensation to a broker for handling the trade.
Sales charges may be reduced for lump-sum purchases. Amounts qualifying
for a reduced sales charge are known as break points. Break
points may start at $10,000.
Redemption fees are charges imposed when investors sell
shares back to the fund. Another name for these charges is exit
fees.
Not all funds charge a fee for share redemption. Funds that do
have redemption fees will deduct the fees from the proceeds of the
sale. The fees are calculated on the amount sold and may be limited
to the value of the original purchase excluding capital gains and
reinvested dividends. Redemption fees are listed in a fund's prospectus
and are retained, in full, by the fund.
A contingent deferred sales
charge is a sales charge that decreases over time. In
many cases, this fee will eventually disappear. The reduction is
an incentive for investors to keep their money in the fund. For
example, a contingent deferred sales charge could be 5 percent during
the first year the shares are held, 4 percent during the second
year, and declining until it hits zero percent during the sixth
year.
12B-1 FEES AND SERVICE FEE
Mutual fund companies assess 12b-1 fees to cover expenses not involved in the direct selling of shares:
- Advertising
- Printing
- Compensation for brokers who sell shares
- Sales literature and its distribution
- Toll-free telephone lines
The name 12b-1 refers to the Securities and Exchange Commission rule that allows funds to use shareholder money for the above expenses. In no-load funds, 12b-1 fees cover sales expenses. You can tell when a mutual fund charges this expense by looking it up in the financial page listings. There it will have a "p" right after its name.
Funds that charge both 12b-1 fees and other service fees may charge a maximum sales load of only 6.25 percent. Those that charge 12b-1 fees but no other service fees may charge a top sales load of 7.25 percent. Finally, funds that do not impose 12b-1 fees or other service fees may charge sales loads of up to 8.5 percent.
The National Association of Securities Dealers is a self-regulatory organization for the securities industry. It sets a limit of 0.75 percent per year on 12b-1 fees. The actual amount companies charge varies from nothing up to the maximum.
Read below to learn about other fees involved with mutual funds.
OTHER FEES
Mutual funds may charge additional fees.
The sales load on reinvested dividends is the charge imposed when a customer reinvests his or her dividends into the fund. Due to competition among funds, few funds charge this fee.
Management fees are charged to compensate those who run the fund's portfolio. They rarely exceed one percent of the fund's assets.
The exchange fee, usually a flat fee, is a charge on money that is transferred from one fund to another within the same fund family.
There are also accounting fees, custodian fees and various other mutual fund expenses.
Be sure to read any fund's prospectus carefully so you may determine just how much of your invested money is actually going toward buying shares.
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