Mutual funds are an excellent investment strategy for the investor that doesn’t want to worry about the day-to-day fluctuations in the stock market. A mutual fund does come with a price tag though. When someone opens a mutual fund, they are paying another person to manage their money and act on their behalf. Typically mutual funds are assigned to fund managers that work hard to make money for their clients. Since doing analysis, research, and exchanges are time consuming, it is only natural to assume there will be a fee attached to a mutual fund. The problem for many investors is just how many fees they are actually paying. Unfortunately there are those companies out there that just want to make some money and they gouge their clients with hidden fees.
Mutual fund fees are generally reasonable if the right fund manager is involved. The investors pool their money into a large account and it is invested into various stocks, bonds, or other things. Really, mutual funds give investors a bargain for the services they obtain. The biggest decision an individual needs to make with mutual fund investing is the cost of the service and its value. Does the fund manager have enough knowledge and experience to really make you money? What is a fair price for mutual fund investing? If a mutual fund manager guarantees higher returns, is their fee worth paying?
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Spotting Hidden Fees in Mutual Funds:
Fees and Mutual Funds Mutual Fund Fees Avoid Fund Fees Mutual Fund Hiding Fees Selling a Mutual Fund Fee Policies of Mutual Funds Fee Structure of Mutual Funds Investors’ Mutual Funds Mutual Fund Fees- Charges and Management Expense Ratio Fees and Mutual Fund’s Overall Return |
There are several different fees involved with mutual fund investing. Here is a list of various mutual fund fees you can expect to see:
- Sales charges or loads
- Management fees
- 12 B-1 fees (various fees to determine the value of the mutual fund)
Every mutual fund will have a management fee involved. This fee tracks the payment to the manager, the building, research, and other things that are involved with mutual fund investing. When a manager needs new equipment, like software, they can add additional fees to their client’s mutual funds to help cover the cost. The average cost for management fees is about 1% to 1.5% of the total investment each year.
Investors that do not want to pay management fees need to look into purchasing an index fund. Index funds do not include the selling of stocks or bonds unless an investor wants out of the index fund. An index fund includes all the stocks that are part of an external index. Managers of index funds spend little time on the fund, other than to review various aspects and make sure it is gaining revenue. Index fund managers do not look for new investments nor do they worry about selling a stock, this makes index funds much cheaper than other funds. Typically index funds charge less than 0.2% in management fees per year.
Several investors opt to purchase foreign funds. A foreign fund requires a larger investment on the part of the fund manager. Typically fund managers will spend half of their time on research and navigate the foreign markets. Trading in a foreign market is much harder than many investors think and without the proper training and experience; investors will have a difficult time. Fund managers of foreign funds charge a larger management fee to cover their costs and to help pay for the higher trading costs. Depending upon the company, an investor in foreign funds can expect to pay around 2.15% per year in management fees.
Most funds include a sales charge, or a load. No-load funds are those that buy funds directly through the company. No-load funds are the best ones to invest in. A lot of people purchase their mutual funds through a stock broker, but there are other ways of purchasing mutual funds. There are mutual fund companies that allow you to purchase various mutual funds and help investors gain experience in the market. Mutual funds were established for individuals that didn’t have as much money as other investors to help them participate in the stock market world.
A lot of mutual funds will ask for a fee when you invest in the mutual fund. The fee is known as a front-end load. The front-end load fees are for “A shares” that are sold to you by the mutual fund manager. Another fee you may pay with a mutual fund is known as a back-end load. This fee will based when you leave the mutual fund. The fee is known as a “B share”. With some funds, the B share will diminish the longer you remain in the fund.
Other areas where investors need to watch for hidden fees are in the 12 b-1 or “c shares”. These extra expenses pay for marketing, software, sales, and other “hidden” costs. Some managers will charge the B share when an investor leaves the mutual fund and they will charge more for additional expenses. Any time a manager prints and mails prospectuses, they can charge the investors through hidden fees in the mutual fund. While these fees may only be 0.2%, they will create a drag on the performance of the mutual fund over time.
While it is sometimes good to add additional shareholders to a mutual fund, it can impact the performance of the fund. Every time additional fees are tacked on to compensate for marketing, advertising, and commission costs, investors are charged. Bulk discounts don’t apply for having more shareholders in a mutual fund, which is why a lot of investors like to keep them small. If a mutual fund has a 12 b-1 fee, it is better to avoid that fund and move onto the next one.
Another area to consider with mutual funds is taxes. Even investors that keep their mutual fund shares could be taxed. A lot of funds own dividend-paying stocks and shareholders will be stuck with the tax bill. If fund managers sell some stocks and make a significant gain, the shareholders will be the ones responsible for paying the taxes. Investors will owe taxes on capital gains and on dividends, causing many investors to sell their funds and get out of mutual funds altogether. Even funds that decline in value will be held accountable for taxes. The mutual funds to invest in are those that avoid rapid trading and match winning trades with losing trades.
Always examine the fee structure of a mutual fund carefully. Investment management companies have devised strategies to keep the money rolling in. Fees for operating expenses are common and the total fee charges annually to investors can be filled with hidden charges. The total fee that is reported to investors is commonly known as the expense ratio.
What most investors are unaware of is that all the fees will be charged against the net value of the investment. This means that all the operating expenses, salaries, bonuses, bookkeeping, marketing, legal fees, and other charges will be taken out of the investment. The highest the expense ratio can get is 2% annually. Some companies won’t charge any fees for a given time period in order to make their returns look better. After a set amount of time, they will charge fees again, and tack on additional fees to pay for the grace period. The operating fees will be accrued on a daily basis for the duration of time an investor owns the share. Typically the operating expenses are deducted on a monthly basis.
Another set of fees mutual fund investors need to look for are account maintenance fees, exchange fees, and transaction fees. Depending upon the size of the investment, investors may be forced to pay an annual account maintenance fee. When an investor switches money from one investment Management Company to the mutual fund or to a different mutual fund, will be charged with an exchange fee. Transaction fees are pretty common as they go toward paying the fund instead of the staff members.
Take a look at the prospectus of a fund before you invest. To look at the prospectus of a fund is to look at the different classes of shares within the same fund. There will be a chart that compares the expenses for each class and shows the return ratio for each class. The longer an investor holds onto the fund, the larger the return percentage. The fee structure is one of the most important parts of a mutual fund since it impacts the daily rate and overall earning from a mutual fund. Every additional fee in a mutual fund will diminish the returns over time.
Watch out for the sales charge when obtaining a mutual fund. Some companies will require a “down payment” to cover the first few months of operating expenses for your mutual fund. Always determine if the investment you make on the mutual fund company will give you greater earnings. Companies with large upfront costs don’t always produce positive returns for their clients, so be sure to watch out for companies that require a lot of cash up front or ones that have large monthly fees to cover operating expenses.