Advertisement
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.

Advertisement - Article continues below

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.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

10 of the Best Target-Date Fund Families
mutual funds

10 of the Best Target-Date Fund Families

The best target-date funds are a 'set it and forget it' approach to your retirement, but which fund family should you trust your money?
September 17, 2020
Best Bond Funds for Every Need
Investing for Income

Best Bond Funds for Every Need

In a changing market, it’s important to remember why we hold bonds in the first place.
September 15, 2020
How to Build a Bond Portfolio
Becoming an Investor

How to Build a Bond Portfolio

No single bond (or even bond fund) can do it all. We'll help you match your goals with appropriate fixed-income picks.
August 27, 2020
Time to Buy Japanese Shares?
Foreign Stocks & Emerging Markets

Time to Buy Japanese Shares?

In a weak global economy, T. Rowe Price Japan finds firms with healthy balance sheets.
August 27, 2020