Mutual Fund Fees

Mutual funds are incredibly expensive when compared to other investments, so what are you really paying for? Well in the article titled Mutual Funds- What You Need To Know you will find that you are paying for the financial expertise of a mutual fund manager who essentially manages money that shareholders invest in a fund. The mutual fund manager cannot possibly be worth tens if not hundreds of millions of dollars a year though; so what are you paying for when you buy into a fund?

It turns out that the fees paid when investing in a mutual fund do not just go to the fund manager; fees are distributed amongst the main players. Depending on what type of mutual fund share you purchase (A, B, C, etc.) you may pay these fees up front, spread out over the course of the investment period, or at the sale of your mutual fund investment. But these fees are not to exceed the combined total of 8.5% of the public offering price. 8.5% isn't the most you pay, so what else are you paying for?

Legal Fees- Lawyers are required to file registration applications required by the securities and exchange commission. Lawyers won't typically simply fill out the applications and turn them in like it were some 6th grade science project. Typically a review of the fillings and interpretation of legalese is needed. Amazingly this requires an individual with specialized Judicial Doctrine.

Administration Fees- These fees include the salaries of the highly qualified individuals that make the fund operate like a business. Also included are other general costs of doing business like the cost of office space, equipment, etc.

Brokerage Fees- We all pay these if we invest through a broker like Scottrade or E*trade. These are the costs associated with making a trade or a change in a portfolio. Obviously if a fund manager were making poor choices buying and selling and loosing money, brokerage fees would be driven up.

Advertising Fees- Marketing of a mutual fund is crucial to its success. Often you will find TV advertisements of the popular Van Kampen fund, so this isn't uncommon; However, only 12b-1 funds can pas this cost on to shareholders.

Printing Fees- Funds spend enormous amounts of money on printing prospectuses and annual reports which are required by the SEC.

Obviously the fund will pass on as many costs to the shareholders while still grasping shareholder attention with lucrative returns- This is a part of doing business. But how long will it take for the shareholder to realize a profit from their investment with all of these fees? It turns out that it depends on the type of shares you hold (A, B, C, etc.) and when you pay the fees. Generally to realize a gain from a mutual fund, a holding period from 5 to 10 years is needed for the investment to pay for itself. So think about what you're investing in and make informed decisions.


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