Mutual Fund Fees
One of the biggest problems with picking a mutual fund is the variety and number of fees that might or might not be involved. The success of mutual fund investing has made it especially complex, and making valid comparisons is difficult. Some fees are hidden; some apply when you sell rather than when you buy; and some are given different names from one fund to another. The range of fees includes the sales load. This fee should apply only when you buy mutual fund shares through a broker or financial planner.
As the name says, this is a sales commission paid to the salesperson who recommends a fund to you. A common fee is 8.5 percent, meaning that the minute you invest $100, the load of $8.50 is deducted and given to the salesperson.
Key Point Making like-kind comparisons among mutual funds is so diffi cult because the many diff erent fees vary and are given diff erent names.
The fee comes off the top, meaning that only $91.50 of your $100 goes into the investment. The group of funds known as load funds
are those that deduct this commission. However, even if you purchase shares directly and without assistance from a financial planner, you might have this sales load deducted. Over history, there has been no trend of load funds outperforming the commission-free funds you can buy on your own, known as no-load funds
. A justification for paying a sales load would be that a financial planner has researched and compared all available funds and knows that the fund he or she is recommending is most likely to perform well in the market. This also assumes that the broker or planner has examined the portfolio and investment experience of management and has seen a clear distinction of one fund's performance over another. These assumptions are not necessarily true. The problem comes down to that commission. A salesperson who is compensated by commission is not going to recommend a no-load fund even if it is likely to outperform a comparable load fund. In addition, you should not assume that the research and comparison of investment value has even been performed before a recommendation is made.
Key Point If a financial expert is promoting a load fund as your best choice, ask for proof based on recent performance. Paying a sales commission does not ensure that you will be investing in a better choice.
The load is also called a front-end sales load
because the commission is deducted right off the top before your capital is invested in shares of the mutual fund. Recognizing how disadvantageous this is, some mutual funds have devised what is called a back-end sales load
. This is a fee deducted when you redeem shares, so that the sales commission comes out of your accumulated investment plus earnings, rather than being taken before the investment is even made. The back-end load may not be charged at all. In some very popular arrangements, the back-end load is actually called a contingent deferred sales load (CDSL)
. This is charged only if you redeem shares within a specified period of time. If you hold shares beyond that deadline, the fee will not be assessed. The contingent load may be reduced over a period of years, eventually falling to zero for extended holding periods. A mutual fund calling itself a 'no-load' fund will not deduct a sales load, but many do assess other fees given a broad array of names. These include purchase fees, redemption fees, exchange fees, or account fees. None of these are considered sales loads as long as they do not exceed percent of the current value of an account. So a fund describing itself as no-load might change fees under a different name.
Key Point A fund called 'no-load' is not always the cheapest to buy; a variety of fees and charges might apply.
A redemption fee
differs from a back-end sales load in the sense that it is not paid to a salesperson, but is described as covering the cost the fund has to absorb when it redeems your shares. Redemption fees are limited to 2 percent or less of the value of redeemed shares. All mutual funds charge some fees. These include the management fee
, which is compensation for the professionals who research companies and make buy and sell decisions in the portfolio. The real test of a fund's valueâ
By Michael C. Thomsett