Types of Expenses and Fees

It is important to understand the types of fees and expenses associated with your investments, so that you can make the right investment choices for youand decide if what you are paying is reasonable for the services you receive. With mutual funds, fees pay for professional management, account recordkeeping and investment advice, and other basic services to run the mutual fund. Some fees are paid from the funds assets, some are paid directly by the investor, and some are deducted only for certain services or circumstances.

Before choosing an investment, read the prospectus which outlines the fees and expenses associated with it.

Operating Expenses

These expenses are paid from a mutual funds assets. There are three types of operating expenses.

Management Fees cover the costs to manage the investment portfolio and administrative expenses, and all funds have these charges. Fees usually range from 0.5% to 1% of the fund’s total asset value and are often higher for specialized funds. They are reflected in the funds share price and are not directly charged to the investor.

Other Expenses include legal, accounting, custodial and recordkeeping expenses.

Distribution Fees. called 12b-1 fees, are marketing expenses to distribute the fund. Not all mutual funds have 12b-1 fees. For a fund to be called no-load its 12b-1 fee must not exceed 0.25% of assets.

Expense Ratio

Every fund has an expense ratio, which shows how much of a funds assets are used for expenses. Shown as a percentage of assets deducted annually for expenses, this is an important barometer of what you will be paying and how that might affect your earnings. You will find the expense ratio listed in the funds prospectus. Naturally, the goal would be to look for a fund with a low expense ratio, but keep in mind that certain funds have expense ratios that reflect costs to operate a certain type of fund, its size or objectives.

Some fees, called shareholder fees and transaction fees are paid directly by the investor and not reflected in an expense ratio.

Shareholder Fees

Sales charges. or loads pay for the services brokers and advisors provide their clients and are associated with load funds.

Account fees may include purchase fees, redemption fees, or exchange fees. An account fee may be charged for maintenance for the account, especially when it falls below a certain dollar amount.

It is important to minimize fees relative to the services you receive. Evaluate a funds objectives, past performance and other service advantages to determine if the fees paid are reasonable. For example, an index fund is passively managed, designed to track a market index and does not conduct individual security analysis. This results in low fees. An actively managed fund attempts to return more than its benchmark index, and charges higher fees for that expertise and security selection.

When paying a financial advisor, you should evaluate if the fee you pay the advisor meets the value you receive from their advice. These fees are often paid through sales charges, a percent of assets called a wrap fee, or a flat fee.

Sales Charges and Share Classes

No-load funds

A Shares

B Shares