investing

Fund Basics: Sales Loads and Other Charges

Learn about the expenses funds charge and which ones you can avoid.

Funds offer plenty of benefits to busy investors. Here's a quick review of what they'll cost you.

Some mutual funds impose a sales charge when you purchase shares. These loads are essentially commissions that pay the professional adviser or broker who sold you the fund. There are also thousands of other no-load funds. They market directly to the public and have no salespeople. If you choose to research and invest in funds on your own, there is no need to pay this commission.

Sometimes the mutual fund tables in newspapers show two prices: the net asset value or "bid" price (the price at which the fund will buy a share back from a shareholder), and the "offering" or "asked" price at which you can buy a share. The offering price includes the maximum sales charge. With no-load funds, the bid price is identical to the asked or offering price.

Front-End Loads

These charges hit you before your money is even invested and can cost you more than you think. Loads can vary greatly, but 5.75% isn't unusual. If you invest $1,000 in a fund charging a 5.75% load, for example, $57.50 will be subtracted up front and $942.50 will be invested in the fund's shares. A 5.75% sales charge thus works out to about 6.1% of your net investment.

Deferred or "Back-End" Loads

These fees are deducted from your account if you redeem shares before a specified period elapses. The amount of the charge and any conditions under which you may be exempt should be explained in the prospectus, but the language may be confusing.

A key point to check is whether your entire interest in the fund or just the amount you originally invested is liable to a deferred charge. If increases in net asset value, capital-gains distributions or dividends are exempt, you know going in the maximum charge you face and that your profits are shielded.

Redemption Fees

Slightly different from deferred loads, redemption fees are more worrisome if you are investing for capital gains rather than dividend or interest income. A redemption fee is levied against the net asset value when you sell, so it nips profits as well as the amount you invested.

Marketing Fees

Many funds take a special deduction from assets for advertising, marketing and other expenses, including commissions paid to brokers. These charges are called 12b-1 fees. If a fund charges no sales fee but levies a 12b-1 fee that is greater than 0.25% of assets, by law it can't call itself a no-load fund.

Management Fees

The fund's professional managers are paid an annual fee, commonly 1% or so of the fund's average assets but sometimes much more. (Fees tend to be higher for stock-oriented funds than for bond-oriented funds.) Some funds use an incentive system, periodically adjusting the fee according to the fund's performance compared with the stock market as a whole: The better the performance, the higher the fee. Nevertheless, all funds charge a management fee.

QUIZ: Test Your Investing IQ

The best way to compare management and 12b-1 fees between funds is to look at their expense ratios. These figures are calculated by totaling the management and 12b-1 fees (but not loads) and dividing them by the fund's total assets.

Most Popular

When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit
Tax Breaks

The Recovery Rebate Credit: Get Your Full Stimulus Check Payment With This Tax Credit

If you didn't get a stimulus check, or you didn't get the full amount, you may be able to claim the recovery rebate credit on your 2020 tax return.
January 18, 2021

Recommended

The 11 Best Vanguard Funds for 2021
mutual funds

The 11 Best Vanguard Funds for 2021

It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
January 7, 2021
2021's Best Mutual Funds in 401(k) Retirement Plans
mutual funds

2021's Best Mutual Funds in 401(k) Retirement Plans

A key to smart saving for retirement: spreading your portfolio across a few of the best mutual funds in your 401(k) plan. Here, we profile the top opt…
December 29, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
December 28, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
December 28, 2020