Understanding Mutual Fund Fees

Mutual funds often have hidden costs that can easily eat into your return. While you may not be able to understand all of these fees, you can certainly be aware of how fees work in general. The fund industry often hides costs through complex layers of jargon and financial talk. When examining the fees associated with mutual funds, it becomes obvious why some companies can get away with the fees they charge - the fees are so complicated that the average investor doesn't even understand that he is paying them, or what he is paying for!

Fee Categories

There are two main categories for mutual fund fees. There are fees that you pay on a yearly basis which keep you invested in the fund; and there are transaction fees that are paid when you either buy or sell shares in the fund.

The Management Expense Ratio (MER)

The MER is the representation of all of the ongoing expenses included with a mutual fund. This expense is composed of three main parts. First, there is the cost of hiring the fund manager or managers. This cost, known as the management fee, ranges from .5% to 1% of the assets in the fund, on average. This can end up being a great deal of money, assuming that the fund has a good deal of assets. Next, there are administrative costs which include postage, record keeping, customer service and relations, running the office and more. Finally, the third expense is known as the 12B-1 fee. This is for public relations and marketing, including advertising and promoting the fund. It's also for paying the brokerage commissions.

With all of this considered, the expense ratios in most funds range from .2% to 2%. The average equity mutual fund charges between 1.3% and 1.5%. Generally, if you are invested in specialty or international funds, you'll pay even more for the expertise of the managers.

Are Higher Fees Worthwhile?

No research, at this time, has validated the need for more fees. Every study done has shown that there appears to be no correlation between higher expense ratios and higher returns. Therefore, don't get taken in by the idea that one mutual fund is fancier than another because it costs more to be part of it. This is simply not factually true.

Mutual Funds with Loads

Loads are fees that a mutual fund uses to pay brokers or other salespeople. Whenever possible, it is advisable to avoid funds with loads and to buy only no-load mutual funds. These funds sell the shares without a commission or sales charge. While some people assume that a load means that the fund is more worthwhile, or that it will give a larger return, there is no research to substantiate this claim.