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While some people may not realize this, mutual funds are run just like any other business. Since it costs money to run a mutual fund, investors pay for it through a number of fees.
Understanding the fees charged by mutual funds can help you select the right funds to grow your portfolio. By minimizing the fees you pay, you maximize the money that goes toward building your investments.
The Securities and Exchange Commission (SEC) notes that even small differences in fees between funds can add up to substantial differences in investment returns. This is why it pays to learn more about mutual fund fees and how they affect your portfolio’s performance.
What are mutual fund and DSC fees?
Running a mutual fund costs money. Some funds are cheaper to run than others. Mutual fund fees are how funds pass the costs on to investors who buy and sell shares.
All mutual funds have a management fee called an expense ratio. They subtract this fee from the total fund assets before listing the share price. In addition, some funds charge deferred sales charge (DSC) fees that are paid out when you sell the shares.
Common mutual fund shareholder fees:
Sales charge or load
Deferred sales charge or load
In addition, there are several fees associated with an annual fund’s operating expenses. These include management fees, distribution and/or service fees, and so on.
Before you invest in a particular fund, study the fund prospectus. It will list all the fees that the fund charges so you can compare expenses between funds. Two funds may look the same until you compare the fees.
How much you have in your investment portfolio is in direct proportion to how much you pay in fees and expenses.
Mutual fund shareholder fees explained
So, what are the different mutual fund fees? When you look at a fund’s prospectus, you will find a mutual fund fee table. Every fund is required to disclose operating expenses and shareholder fees in its prospectus.
Here are common shareholder fees and how they affect your portfolio:
Sales charge (load): A sales charge, or load as it’s sometimes known, is similar to a commission you pay to a broker. It’s a fee investors pay when purchasing a security or fund shares from a broker. These are also sometimes called front-end sales loads in fee tables.
Deferred sales charge (load): The DSC or DSL is a fee investors pay when selling their shares back to the fund. It’s also referred to as a back-end sales load. When purchasing the shares, an investor does not pay an up-front fee or sales load. However, if investors sell the shares within a specific amount of time, they have to pay a DSC fee on the sale.
Redemption fee: This type of fee is paid directly to the fund and not a broker. It’s charged when a shareholder redeems shares and is used to cover the funds associated with the transaction.
Exchange fee: Some funds impose an exchange fee on shareholders if they transfer to another fund within the same group.
Account fee: This fee is similar to a maintenance fee on a bank account. Some funds impose the fee if a shareholder’s account balance goes below a certain threshold.
Purchase fee: This fee differs from a sales charge but is also paid when purchasing shares. It is paid directly to the fund and used to offset some of the costs associated with the purchase.
Other mutual fund fees
In addition to all the shareholder fees listed above, funds can also impose charges to cover annual operating expenses. If you look at the fee tables in a fund’s prospectus, you will find a table called “Annual Fund Operating Expenses.”
Common annual fund operating expense fees:
Management fee: This fee is paid out of the fund’s assets and covers expenses associated with the investment adviser. It’s the cost of managing the fund’s investment portfolio. This could also cover administrative fees for running the fund.
Distribution (and/or Service) Fee: This fee, covers a fund’s distribution expenses. This can include expenses for marketing and selling fund shares, paying for advertising, printing, and mailing of prospectuses and sales literature.
Other expenses: This is a catch-all fee for all costs not covered by the other fees. This can include legal, custodial, accounting, administrative, and transfer agent expenses. In addition, it may include charges for shareholder service expenses.
Total annual fund operating expenses: If you want to get an overall view of how much it costs to run a particular fund, look at this line item. It will be expressed as a percentage of the fund’s average net assets.
What is the average mutual fund fee?
The fees that funds charge will vary depending on the expenses to run the fund, the investments that are part of the fund, and a number of other factors. The easiest way to compare fund fees is to look at the expense ratio.
A fund’s expense ratio is an annual fee expressed as a percentage that shows how much of your investment goes to pay a fund’s expenses.
There are many factors that determine a fund’s expense ratio. Anything between 0.5 and 0.75 is considered a low expense ratio. If the mutual fund you’re considering has an expense ratio that’s greater than 1.5 percent, consider looking at other options as that is on the high end.
Wealthsimple’s management fees fall on the low end with 0.5 percent for those who invest less than $100,000 with us. Ready to invest more? The fee drops to 0.4 percent for investors who entrusts us with more than $100,000.
Since mutual funds are actively managed, their expense ratios are higher than exchange traded funds (ETFs). ETFs follow an index such as the S&P 500 and are not actively managed (i.e. no securities are bought and sold).
How are mutual fund fees deducted
Mutual fund fees can be sneaky. Most of the time, the money comes out of your investments so you don’t get a bill for it. This makes it easy to overlook.
If you put a $10,000 in your account to buy a fund’s shares that come with a 1 percent expense ratio, $100 will be taken out to cover the fee.
Other fees are deducted from the fund’s earnings and lower a shareholder’s return on investment. Review the fund’s prospectus to get a better idea of how the fees are charged and what you can expect when buying shares.
The bottom line on mutual fund and DSC fees
There is no way to avoid paying fees on funds altogether. Even ETFs that follow an index charge a fee to cover expenses. However, the amount of fees you pay is directly related to your overall return on investment.
One of the best ways to ensure you are maximizing your investment is by limiting the fees you pay. Review each fund’s prospectus carefully and figure out what charges such as DSC fees you can expect to pay on your investment.
This will help you make better decisions when selecting where to put your money and how to get the biggest return on your investment.
Ready to invest? We can help. Wealthsimple Invest can help you build an intelligent portfolio of low-fee funds that minimize risk while maximizing rewards. Choose your risk level and we will take care of the rest. Put your money on autopilot by signing up today. Let’s get started!
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