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Mutual Funds
Fees and Expenses |
Examining the operating costs of a mutual fund is
another part of the investment selection process. The reason is simple: fees and expenses
can eat away at your total return.
Actively-managed funds -- such as stock or international funds -- tend to have higher
expense ratios than other types of funds. They require more research and often have high
turnover rates. Bond, money market, and index funds normally have the lowest costs for
mutual funds.
Rather than viewing each fee individually, you should concentrate on the fund's expense
ratio. It's a good indicator of the fund's true cost. Expense ratios are determined by
dividing the total expenses by the fund's net assets. The prospectus will identify the
fund's expense ratio.
Expense ratios are calculated using the following fees and costs:
All mutual funds have management fees. The fund manager has to eat, right? -- steaks,
lobster, champagne. Management fees are paid to the fund manager who is responsible for
day-to-day operations of the fund (trading, shareholder services, etc.). Fees typically
range from .5% to 1% of the fund's total assets
Administrative Costs
Costs associated with administrative functions of the fund -- record keeping, printing and
mailing of the prospectus, stamps, phone lines, web sites, annual or quarterly reports.
Costs range from .1% to .5% of the fund's total assets.
12b-1 Fees
Some funds carry a 12b-1 fee. It's used to cover advertising, sales and marketing costs,
distribution costs, and even some commissions. Ranging from .1% to a max of 1% of the
fund's total assets (.25% for no-load funds), 12b-1 fees are levied annually. So the
longer your money stays in the fund -- the more you'll pay in fees. Your fund's prospectus
should identify whether 12b-1 fees are part of the fund's operating costs.
Don't forget -- costs do matter.
Next: Performance
Mutual Fund Calculators:
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• How do growth and income
funds compare?
• Which is better: a front
or back load?
• Which is better: load or
no load?
• How much do fees affect my
return? |
