FastFacts: Mutual Fund Expenses

Transaction expenses – Fees you pay directly when you buy or sell fund shares.

Front-end sales charge or load: When you buy shares, some funds charge you a load to pay commissions to the financial representatives who sell the funds to you, as well as to cover other marketing and distribution costs. By law, this charge may not exceed 8.5% of your investment amount, although typical charges are lower at 5% or 6%, 2% to 4% for low-load funds. Front-end loads are usually stated as a percentage of your investment. For example, if you invest $5000 in a fund with a 5% load, $250 goes to pay the sales charge, and $4750 is invested in the fund.

Contingent deferred sales charge: When you sell shares, some funds charge this type of back-end load to compensate financial representatives for their services. These deferred charges typically decline over time, and eventually disappear after you’ve held the fund for a number of years. For example, some funds use a sliding scale and charge a fee of 5% if you sell shares the first year you own them, down to 1% if you sell in the fifth year, and no charge if you sell after that.

Redemption fees: When you sell shares, some funds impose this back-end charge regardless of how long you’ve held your shares. These fees are charged to discourage short-term trading, and are typically imposed only if you sell during the first six months or year that you own shares. Frequently, these fees are paid to the fund itself, rather than to a fund company or broker.

Annual operating expenses – Ongoing costs that are deducted from a fund’s assets before its earnings are distributed to shareholders.

General administrative expenses: Charges for such things as equipment, office maintenance, and legal and accounting expenses.

Management fees: These fees compensate a fund’s investment adviser for managing the fund. According to the Investment Company Institute, they generally average between .5% and 1% of a fund’s assets annually.

12b-1 fees: Some funds charge this annual fee to pay for marketing, advertising, and distribution expenses, or to pay commissions to sales representatives. Named for the Securities and Exchange Commission rules that govern such fees, 12b-1 fees can’t exceed .75% of a fund’s average net assets per year, plus an additional annual service fee of up to .25% to compensate sales representatives.

Expense ratio: This is all of the above annual operating costs taken together, expressed as a percentage of a fund’s average net assets during the year. It’s the total cost of owning the fund. For example, if you own $10,000 worth of shares in a fund with an expense ratio of 1%, you’ll pay $100 a year in total operating costs.