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Understanding Mutual Fund Fees

Are you overlooking the value of keeping your savings in a mutual fund?

In 2015, there is  $15.85 trillion invested in the nation’s mutual funds, according to the 2015 Investment Company Fact Book by Investment Company Institute.

Mutual funds allow you to buy into a diverse pool of investments, including short-term securities, stocks and long-term bonds, among other options.

Your risk is spread among a number of investments, which is a less risky choice than investing in just one company.

There are typically charges associated with any investment, however, and that’s also true of mutual funds. When choosing the best investment for you, it’s a good idea to understand those fees and how they will affect your investment.

Load vs. No-Load

Some funds charge you a sales load — -a kind of commission — for purchasing shares in the fund. “No-load” funds don’t require this fee, but be aware they may levy other charges, including purchase, redemption and account fees. As a result, it’s important to review exactly what costs are involved when deciding which funds to invest in.

Where to Find Information

Sales loads are not the only fees that a mutual fund may charge. To learn about the costs read the fund’s prospectus, a brochure that will provide all the information about the fund. The prospectus will have a section on shareholder fees, which will detail charges associated with transactions, such as buying or selling fund shares.

In addition, funds typically use fund assets to pay their own expenses. That means that even though they aren’t charging you directly for these costs, they are being deducted from the fund’s overall balance-—including your portion of it. The prospectus includes a section on operating expenses, which will outline the costs you can expect.

These may include management fees, distribution fees and other related expenses. The prospectus will also show the annual operating expenses expressed as a percentage of the fund’s average net assets.

Making Comparisons

Many of the figures you find in prospectuses may not make sense on their own, but they will come in handy for comparisons with other funds. It’s important to remember, for example, that a fund may still be a good investment even if it has slightly higher fees than another choice that you’re considering. However, over time, the fund with higher fees must perform better than another fund in order to generate the same net returns.

Tools You Can Use

The Securities and Exchange Commission site has mutual fund calculators that you can find by going to sec.gov and clicking on “Calculators” under the “Education, Investor.gov” tabs.  

In addition, a calculator on the site of the Financial Industry Regulatory Authority allows you to compare the expenses of up to three funds or share classes of the same fund. You can find it at finra.org, under the “Investors” and  “Fund Analyzer” tabs.

Don’t Forget Your 401(k)

The mutual funds that are included in your employer’s 401(k) plan also carry their own fees. It’s a good idea to review them to ensure that you understand how they will affect your 401(k) investment. If your employer offers a choice among several funds for your 401(k), you may find that the fees involved could affect which one you pick.

Have more questions about mutual funds or other investment options? Turn to your local CPA for information to help you with all your financial planning needs.

Copyright 2008, The American Institute of Certified Public Accountants
(Updated and reviewed 2016)