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What are the Expenses Associated with Buying and Owning Mutual Funds?

Several forms of fees and expenses may be charged to those who own, buy, or even sell mutual funds. With mutual funds, there two types of charges that might be paid by the investor: expenses and fees.

Different types of share classes may have different types structures to their fees and expenses. Expenses are the operating costs of the fund company, essentially, and these show up in all mutual funds, usually labeled as expense ratios. The returns reported by the fund will be after expenses.

There are several subsets of expenses that are allowed to be charged, and there are limits on each, but we can skip the finer details. The individual expenses are totaled-up to give us the Expense Ratio.

The second type of charge that might be incurred by an investor are the “fees,” which is another word for “sales charges.” In colloquial investment industry language, these are called “loads.”

Loads can be charged on the front end (at purchase) or on the back end (upon sale), but some mutual funds have no load, and these have become extremely popular.

Different share classes are partially defined by whether a load is charged on the front or back end.

To give an example, a Class A or Investor Class share will have a front-end load of up to 5%, but the expenses charged after that are lower than the other share classes, and they are also eligible for breakpoints on the charges if they invest substantial amounts in the fund family.

B and C class shares are generally going to have higher expenses year-to-year, but and they might charge what’s called a contingent deferred sales charge (CDSC), or “back-end load,” if the investor offloads the fund before a set number of years has passed. It is similar to a surrender charge on a variable annuity.

Generally, no-load funds will be passive indexed investments, partially because the fund has saved money by not paying a large team of active managers.

What are No-Load Mutual Funds?
What are Load Mutual Funds?
What’s Better: ETFs or Mutual Funds?
What are the Basics of Mutual Funds?

Keywords: mutual funds, active management, passive management, expense ratio, share classes, CDSC (contingent deferred sales charge),
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