Investing in mutual funds can be a challenge when you take into account the fees that are associated with them. As time has passed, some mutual funds have become very sneaky in how they charge you fees. I say sneaky for two reasons:
- First, they will claim that the fund doesn’t charge a fee when it really charges one on the backend when you sell. The “no fee” they are talking about is one when you buy the fund.
- Second, since the fees are taken from your investment and aren’t spelled out for you on your statement, you never really know how much you are paying.
For these two reasons, you need a basic understanding of mutual fund fees. So grab a cup of coffee and take some notes. After all, it’s your hard earned money you are investing, don’t you want to know how to keep more of it?
The Basics: Load versus No Load Mutual Funds
The load vs no load concept of mutual fund investing is fairly straightforward. A no load fund does not charge you a fee to buy or sell a fund. A load mutual fund does charge you a purchase fee and/or a fee to sell. Let’s look at an example.
Fund ABC is a no load mutual fund. If you invest $1,000 all of your money goes into the investment and you have invested $1,000. Fund XYZ on the other hand is a load mutual fund. The load for the fund is 5.75%, which is fairly typical. If you invest $1,000, not all of your money is going into the investment. In fact, only $942.50 gets invested. The other $57.50 is the fee charged to you and that goes to the advisor/salesman.
In this day and age, there really isn’t any reason to invest in a mutual fund that charges you a load. When you are charged a load, you are already down 5.75% on your investment. If the market gains 5.75%, you are sitting at a 0% return on your money. Don’t fall victim to the trap that buying a loaded mutual fund is a good buy because of the fee. Many will try to get you to fall for the belief that the fund is so good, they have to charge a premium to invest in it. This isn’t the case at all. There is zero relation to a fund performing well and paying a load. None.
Early Redemption Fee
Of course, there are some other fees that you have to be aware of when investing in mutual funds. The biggest one is the early redemption fee. This is a fee you will find on many funds if you sell shares within two or three months of purchasing it. This is done so that the fund discourages people who plan on owning the fund for a short time.
For example, let’s say gold is hot right now and is only going up. Some investors might want to get into a mutual fund that invests solely in gold and then get out a month later, in the attempt to make some quick money. It might seem like there is no harm to this, but when a mutual fund has to buy and sell out of its holdings frequently, it drives the costs up for all investors. Therefore, many funds have instituted this policy to thwart short-term traders. Note that this fee goes to the fund itself and not to a salesman.
For most, this fee should not be an issue to you as you should be a long-term investor and buying and holding funds for the long haul, not for a few weeks at a time, also known as timing the market.
One other fee to be aware of is a 12b-1 fee. More and more funds are charging this fee nowadays. It is basically a marketing fee and is usually around 0.25% annually. It gets lumped in with the management fee of the fund. Some argue this fee is OK to pay. I disagree. What does the mutual fund need to market itself for? If it does a good job and earns money consistently, others will take notice and invest in it as well. It is up to you if you are willing to pay an extra 0.25% per year for advertising. I am not one of these people.
There are all sorts of fees you can potentially pay when it comes to investing in mutual funds. I still like investing in mutual funds, but if you want a clear cut fee when investing, you should look into exchange traded funds (ETFs). There are no purchase or sales fees with these investments. For the most part, all you have to pay attention to is the management fee they charge you. For more see ETFs Versus Index Funds. But if you are mutual fund investor and plan on sticking with them as your investment of choice, do yourself a favor and pay attention to the fees that they can charge you.