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7 mutual fund fees that could eat into your return

Maximize your profits by learning to identify and avoid these common fees.

Mutual fund fees can get complicated in a hurry, but paying too many can seriously reduce your returns.
Here are the most common fees you’re likely to encounter and how to minmize their impact on your bottom line.

What are mutual fund fees?

Mutual fund fees are broadly divided into two categories: annual fund operating expenses and shareholder fees.
Annual fund operating expenses — Ongoing
These are ongoing fees investors pay for the fund’s management. They include:

  1. Expense ratios.
  2. 12(b) 1 fees.

Shareholder fees — One-time
Investors pay these fees for buying and selling fund shares. They include:

  1. Sales charges.
  2. Redemption fees.
  3. Exchange fees.
  4. Account fees.
  5. Purchase fees.

Let’s dive into each of these in greater detail.

7 mutual fund fees to look out for

Mutual funds can help you diversify your portfolio, but at what cost? Most investors don’t know what fees to look for when buying and selling mutual funds. That alone puts you at risk of executing ill-informed trades. Here are seven mutual fund fees to scout for before you invest.

1. Expense ratio — Typically 0.2% to 1%

The expense ratio — a fancy name for a management fee — is a percentage-based fee taken from the fund’s total assets. This fee is used to pay the mutual fund’s managers or the people responsible for maintaining the fund.

Expense ratio example

Let’s say you invest $1,000 in a mutual fund that has a 1% expense ratio. Over a year, the fund sees a 12% return. So, in theory, your $1,000 investment should grow to $1,220. But after the fund’s expense ratio has been deducted, you’re left with $1,207.80.

You’ll typically find the highest expense ratios in:

  • Actively managed funds
  • Small-cap funds
  • International funds

A higher expense ratio is a way to pass on the cost of the fund to investors. Funds with higher expense ratios are generally more expensive to run and maintain. An actively managed fund requires more time and attention than a passively managed fund. International stocks are more expensive to buy and sell than domestic stocks.
The bottom line? A higher expense ratio doesn’t mean the fund is of superior quality. It just means the fund is expensive to maintain — and you’ll be the one paying the difference.
How to avoid expense ratios
Expense ratios are a necessary evil — at least when it comes to mutual funds. But you can lessen their impact by opting for funds that carry lower expense ratios, like passively managed funds, large-cap funds, domestic funds and quantitative funds.

2. 12(b)1 fee — Typically 0.25% to 0.75%

The 12(b)1 fee sounds a lot more complicated than it is. Simply put, it’s a fee that helps cover the cost of marketing the fund. It’s also sometimes called the service fee or distribution fee.
A 12(b)1 fee is actually a component of a mutual fund’s expense ratio, but if you dig into your mutual fund’s prospectus, you’ll find it listed alongside the management fee.
How to avoid 12(b)1 fees
Because it’s part of the expense ratio, the 12(b)1 fee is another one that’s tough to avoid. Again, scout for funds with lower expense ratios to lessen the impact of this ongoing fee.

3. Sales charge — Typically 3.75% to 5.75%

A sales charge is a one-time fee you must sometimes pay when purchasing a mutual fund. This fee is also called the front-end load.

Sales charge example

Let’s say you bought a $100 share of a mutual fund with a 5% front-end sales charge. Instead of paying $100 for the share, you’d owe $105 — the price of the share plus the sales charge of the fund.

The good news is that not all mutual funds carry a sales charge. The ones that do are typically called A-share mutual funds. If you’re looking to avoid a sales charge, you can also opt for a no-load mutual fund, a type of mutual fund that doesn’t carry any sales fees.
How to avoid sales charges
Besides opting for no-load mutual funds, you may also be able to skirt sales charges if you qualify for the fund’s “breakpoint.” The breakpoint is the dollar amount that qualifies an investor to pay a reduced sales charge. You’re essentially being rewarded for making a large purchase.
For example, let’s say the fund’s sales charge is 5%. If you agree to invest over $25,000, you may qualify for a discounted sales charge of 4.5%. If you pay over $50,000, you may only need to pay 3.5% — and so on.

4. Redemption fees — Typically 1% to 2%

A redemption fee is a one-time fee you pay when selling a mutual fund. This fee is also called the back-end load, surrender charge or short-term trading fee. It works the same way as a sales charge — it’s just triggered when you sell rather than when you buy.

Redemption fee example

Imagine you’re preparing to sell a fund you purchased for $100, but a 2% redemption fee applies. When you sell, instead of receiving $100 for your shares, you’ll receive $98 after the 2% redemption fee is deducted.

Redemption fees are designed to discourage short-term trades. As such, they typically only apply to sales that occur over a predetermined length of time. This period may be as short as 30 days but could span one year or more.
How to avoid redemption fees
There are a few ways to avoid redemption fees. One method is to hold onto the fund beyond the redemption fee period. Redemption fees tend to diminish in size as time passes. Or you can avoid the fee altogether by opting for no-load mutual funds, which are funds that don’t charge front- or back-end loads.

5. Exchange fee (varies by broker)

An exchange fee may come into play when you transfer shares from one mutual fund to another within the same investment company — called an inter-fund transaction. The majority of funds let you execute inter-fund transactions for free, but not all.
How to avoid exchange fees
It’s not tough to avoid this one since most investment companies offer inter-fund transactions for free. To find out if a fund charges exchange fees, get a copy of its prospectus and scan through to find its list of fees. If it charges for inter-fund transactions, it’ll be listed there.

6. Account fee (varies by broker)

This fee may be charged if your account falls below a certain threshold. For example, you may be required to maintain a minimum of $10,000 in your account. Should your account balance fall below the minimum threshold, you may encounter an account maintenance fee.
How to avoid account fees
Not all funds carry account fees, so if you’re dead set on avoiding this one, simply opt for a fund that doesn’t charge them.

7. Purchase fee (varies by broker)

This fee may crop up when purchasing mutual funds — but it’s distinct from a sales charge. A purchase fee is a fee the investor pays to the fund itself, while sales charges are paid to the broker selling the fund. The intention of the purchase fee is to offset the fund’s costs for taking on a new investor.
How to avoid purchase fees
Like account fees, purchase fees are far from ubiquitous. Avoid paying purchase fees by opting for mutual funds that don’t charge them.

How to find mutual fund fees

You know which mutual fund fees to be on the lookout for, but the question remains –– where do you find them? Well, you’ll want to turn to your mutual fund’s prospectus.
A mutual fund prospectus is a legal document all mutual funds are required to file with the US Securities and Exchange Commission. To access a fund’s prospectus, you can contact the company and request a copy by mail. Or you can visit the company’s website. Many companies publish PDF versions of their prospectuses online.
Once you’ve got a hold of the fund’s prospectus, you’ll want to scan through until you find the fees and expenses section. Funds are required by law to include this section in their fund documentation. Here you’ll find all of the fund’s listed fees.

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Bottom line

Mutual funds can help diversify your portfolio, but they often carry numerous fees. Read through the fund’s prospectus before making a purchase to ensure you know what you’re buying into. And if you’d prefer to avoid mutual fund fees altogether, explore your investment alternatives to find the assets that best fit your strategy.

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