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Mutual Fund Fee

Mutual Fund Education

What Is a Mutual Fund Management Fee?

Mark P. Cussen Sep 09, 2014

Mutual funds cover their expenses and make a profit by charging several different types of fees to their investors. These fees can vary considerably from one fund to another, and they are charged regardless of whether the fund is making money or not. Some fees are paid to fund managers as compensation while others are used to pay for marketing and administrative expenses. Here is a breakdown of the fees investors pay to have their money professionally managed.

The Expense Ratio

See also the 7 Questions to Ask When Buying a Mutual Fund

The MER and the management fee are often used interchangeably in financial reports and publications, although this is not correct. In fact, many fund companies don’t always clearly aggregate all of their expenses into a single ratio in the interest of concealment. However, they are required by law to publish the actual returns that the fund has historically posted net of expenses. Fund investors should be sure to review these returns when they perform their due diligence on a possible fund choice.

The Management Fee

12b-1 Fees

Shareholder service fees are used to pay customer service employees or others who assist customers with questions or other issues and provide investors with fund data and other information they need to know about their fund holdings. 12b-1 plans do not always have shareholder service fees built into them. If these fees are included in the plan, they will be lumped together with the distribution fee. If they are not included, then they will be listed as an operating expense. These fees have a 0.25% limit imposed on them by FINRA regardless of whether or not they are included in the plan.

Be sure to also see What is the Investment Company Act of 1940?

Other Expenses

Sales Charges

“A share” funds charge their fee upon purchase, while “B shares” have a contingent deferred sales charge schedule that declines each year until it disappears. Investors who purchase B shares may therefore not pay a sales charge per se if they hold the fund long enough, but they will pay higher annual management fees as a result. “C share” funds typically assess a smaller sales charge both at purchase and at redemption, unless the fund is held for a sufficient amount of time.

The amount of the sales charge that is assessed will vary according to a breakpoint schedule. For example, a fund might have an initial sales charge of 5.75% for class A shares for purchases of up to $50,000. The charge for the next $50,000 purchased is 4.75%, then drops to 3.75% for purchases of $100,000 to $250,000, and so on until the sales charge disappears, usually for a purchase of $1 million or more. However, brokers will still typically be paid a 1% commission for million dollar purchases as a courtesy from the fund (and, of course, as an incentive for the broker to make million-dollar sales of the fund shares).

A purchase of class B shares would result in a charge of perhaps 4.75% if the investor sells the shares within a year of purchase, a charge of 3.75% in the second year and so on until the schedule expires. Class C shares might charge one to two percent at purchase and then a one or two percent surrender fee if the fund is held less than two years.

The Bottom Line

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