|
 In this final publication on buying mutual funds we're going to talk about two specific topics - management fees and fund loads. We're also going to quickly talk about the information you'll be able to find about a fund manager in the fund's prospectus.
Managers of Mutual Funds
There was a time when you wanted a mutual fund manager to have a lot of prior stock market experience. But those were the days when mutual fund managers selected stocks based on a lot of "gut" and a little bit of analysis.
Computer programs today make analyzing thousands of stocks over a short period of time a reality. So it's become less important for a manager to have a lot of market experience and there has been a growing emphasis on a manager's technical skills.
If you're investing in a mutual fund, you really should be interested in who is making all of the decisions on where to invest your money. The prospectus for each mutual fund will provide the name of the company supplying the fund manager, the manager's name and start date, and a brief biography explaining the manager's career background.
In the fund manager's biography you can find out where the manager has worked before, prior positions held in each company, and any accreditations they might hold such as a Chartered Financial Analyst.
Mutual Fund Management Fees
Now that you know where you can go to find information about the managers of mutual funds, it's time to talk about the fees they're going to charge you. Generally, a mutual fund prospectus will include information on three types of management expenses:
- 12b-1 Fees
- Management Fees
- Mutual Fund Expense Ratios
12b-1 Mutual Fund Fee
The 12b-1 fee represents the charges deducted from the mutual fund's assets to pay for marketing and contract distribution costs. If the fee structure has changed since the end of the most recent fiscal year, the 12b-1 fee is usually shown as a recalculation using the prior year's average asset base along with the new fee structure.
A fund's prospectus will also contain the maximum fees that can be charged in this area. It is up to the fund's management if they decide to waive any of the associated contract distribution fees.
Management Fee
The management fee typically includes the management and administrative fees associated with running the mutual fund. Actual fees are those that were paid to management in the prior fiscal year. Once again, if the management fee structure changes, the management fee will be restated using the new fee structure and the old asset base.
Mutual Fund Expense Ratios
A mutual fund's expense ratio tells you the percentage of the fund's assets that were deducted to pay for all fund expenses, including 12b-1 fees, management fees and all operating costs. Transaction fees such as brokerage costs are not included in the mutual fund expense ratio.
The size of the expense ratio is typically related to the size, or asset base, of the mutual fund itself. Think of it this way - there are a lot of "fixed" costs associated with running a fund such as the manager's salary. If you have two fund managers with the same salary and one manager is controlling twice as many assets as the other, then you'd expect the expense ratio for that fund to be lower.
Mutual Fund Sales Fees or Loads
The second type of fee you'd typically encounter when evaluating mutual funds is a sales fee, which are commonly referred to as loads. Once again, there are three types of mutual fund sales fees or loads that you may read about in a fund's prospectus:
- Front-End Loads or Initial Sales Fees
- Back-End Loads or Deferred Sales Fees
- Redemption Fees
Front-End Loads or Initial Sales Fees
A front-end load or an initial sales fee is a charge that is deducted from each investment in a mutual fund. The exact fee is usually stated as a percentage of the investment and this percentage usually does not vary with the size of the investment. However, some mutual funds will reduce the fee for larger investments or as the total size of an individual's portfolio grows.
Front-Load Example
Let's say a mutual fund charges a 2% front-load for investments under $25,000 and 1% for investments in excess of $25,000. In this example, a $20,000 investment would pay 2% of 20,000 or $400. And an investment of $30,000 would pay 2% of the first $25,000, or $500, plus 1% of the next $5,000, or $50, for a total front-load of $550.
Back-End Loads or Deferred Sales Fees
The second type of mutual fund sales fee we're going to discuss is a back-end load or a deferred sales fee. A back-end load is a charge that is applied when you decide to sell your shares in a mutual fund. This type of fee structure is sometimes used to discourage active trading in a mutual fund.
Back-End Load Example
For example, a mutual fund that charges a back-end load might charge 4% if you sell you shares during the first year of ownership. In subsequent years, the back-end load might slowly decrease until you reach a point where no fee is owed on the sale.
Redemption Fees
The final mutual fund fee that you need to know about is what is called a redemption fee. Just like the back-end load, a redemption fee is often used to discourage active trading in a mutual fund and it is charged when you sell shares in the fund. Unlike a back-end load, however, redemption fees are typically applied only during the first year of ownership.
Also, when a redemption fee is charged the money is returned to the fund itself, not to the managers of the fund. This means redemption fees are not shown as cost to other shareholders. Redemption fees are usually calculated based on the ending share value - whether the fund's value has appreciated or depreciated over time.
Summarizing our Mutual Fund Series
This finishes it up for this particular series on buying mutual funds. We've talked about fund risks and terms, researching mutual funds, evaluating mutual funds and now fees and loads.
Buying a mutual fund is not like buying a stock and therefore researching stocks is much more complex than with mutual funds. Much of the information you need appears in the prospectus and the fund you pick will be driven by your financial objectives. We hope that this series has given you enough information to help you make an informed decision.
About the Author - Buying Mutual Funds Part IV
Copyright © 2006 - 2007 Money-Zine.com
Mutual Fund Resources on the Web |
Home 
