Mutual Fund Costs

AS A FUND INVESTOR, you incur the fund’s trading costs—but you also have the costs associated with buying, owning and selling the fund itself.

Mutual fund commissions. Broker-sold funds, sometimes referred to as load funds, might charge a commission when you buy, an ongoing commission that’s levied every year (known as a 12b-1 fee) and a commission when you sell.

Investing on your own? You can buy no-load funds, which don’t charge any sort of commission. That means that, when you invest $100, the full $100 is added to your account, versus $94.25 with the typical broker-sold front-end load stock fund. What if, instead of buying your no-load funds directly from the mutual fund company involved, you invest through one of the fund marketplaces operated by discount brokerage firms? You may pay a transaction fee when you buy or you could find that the funds sold through the marketplace levy somewhat higher annual expenses.

Annual fund expenses. All funds, both load and no-load, charge annual expenses to cover the cost of managing the fund and handling administrative tasks. In addition, the annual expenses may include a 12b-1 fee to cover marketing and distribution. This fee is often used to compensate brokers. A fund’s trading costs aren’t included in its published annual expenses.

Fund expenses are expressed as a percentage of fund assets, so a fund with a 1.5% expense ratio is charging you $1.50 a year for every $100 you have invested. You can also think of this as the breakeven hurdle rate. If a fund charges 1.5% a year, it has to pick securities that beat the market by 1.5 percentage points just to match the performance of the fund’s benchmark index.

Account maintenance fees. You might be charged an annual fee if you hold your funds in a brokerage account or in an IRA.

On top of all this, there’s the biggest investment cost of all: taxes. We tackle that at greater length in the chapter on taxes.

Next: Load Funds

Previous: Trading Costs

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