07 What expenses are there for a mutual fund?
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This article is from the FAQ, by with numerous contributions by others.
07 What expenses are there for a mutual fund?
(1) Closed-end funds charge annual expenses for research and
trading expenses. To buy and sell closed-end fund shares,
the investor must usually pay additional brokerage fees, unless
the investor finds someone to buy from or sell to directly.
(2) Open-end funds charge annual expenses for research and trading
expenses. In addition, they sometimes charge the following:
(a) A front end load or sales charge. These vary from 1% to
8.5% subtracted from the amount paid and are usually used
to pay commissions to brokers and financial advisors who
sell the funds. Very large investors can sometimes get
discounts on the front end loads. Currently, fund sponsors
determine loads, but the SEC is proposing a rule to allow
brokers and other salespeople to discount loads.
(b) A redemption fee, deferred sales charge, or back end load.
These work the same way as front end loads, but are charged
when you redeem shares. In many cases, they decline or
disappear after a long enough holding period.
(c) A Rule 12b-1 fee. Used to pay marketing expenses, which
means either commissions or advertising expenses. This is
a fee that adds to the annual expenses; it may be as large
as 1.25% per year. Declining back end loads are common
in funds with large 12b-1 fees.
A mutual fund that has neither (a) nor (b) is generally referred
to as a no-load fund. No-load funds are generally not sold
through brokers or financial advisors, but are sold directly to
investors. Many advertise in business and financial periodicals.
All of the above expenses for open-end funds are described on
the first or second page of the prospectus in a standardized
form. Brokerage fees paid by the fund in its trading activity
are _not_ normally included in such expense tables as they are
usually accounted for in the cost of securities bought.
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