Whether you call it a fee, a charge or an expense, there is a whole list of ways that actively managed mutual funds can separate you from your money. Here are the primary means by which your assets can be reduced:
1. Load. Another word for sales commission, typically it's three to six percent, but it can run as high as 8.5 percent. If a fund is identified with the letter "A" at the end of its name, it's called an A share, which means you pay a front-end or up-front load. The charge comes straight off the top of your investment. So if you plunk down $10,000 and there's a five percent front-end load, $500 is deducted and only $9,500 is actually invested. Class A shares will typically have smaller annual 12b-1 fees than class B or class C shares, and discounts on the front end load may be available at certain breakpoints.
B shares have a back-end load, meaning you're charged when you redeem the shares, though some funds phase out the sales charge over the time. 12b-1 annual fees are usually higher than for class A shares. C shares have annual fees that are even higher than other classes, so if you're planning to hold the fund for the long term, it's wise to stay away from them.
Additionally, there are many high-performing no-load funds and you may be able to find a no-load alternative that is at least equal to - if not better than - a "loaded" mutual fund.
2. Expense ratio. This is the fund's operating costs, and it includes management and administrative charges. This fee is a percentage of the fund's net assets and is deducted from your return. Most funds also have what are called 12b-1 fees; these cover the costs of marketing, promotion, and distribution. A fund's 12b-1 fees are included in the expense ratio.
3. Redemption fees are sometimes charged when you pull out of a fund. It sounds like a back-end load, but in this case, the money goes into the fund as opposed to being added to company profits.
4. Exchange fees. Some fund families discourage inter-fund transfers by charging a fee. If you're picking a fund family - as opposed to a solitary fund - make sure this isn't the case before you invest. It's just another unnecessary way of separating you from your money.
5. Reinvested dividends fees. Steer clear of funds that charge you to have dividends rolled back into your account; there are plenty of good funds that won't make you pay to keep your own money!
Before we leave the subject of loads and fees, here's a trivia tidbit. Sometimes the same manager is in charge of two funds: one that is loaded with high-expenses and one that is cheap. Why not go for the bargain, considering that you have the same manager in charge? For example, Bill Gross has an amazing track record as a manager and is at the helm of two intermediate-term bond funds; PIMCO Total Return A, which has a 3.75 percent load and 0.90 percent expense ratio, and Harbor Bond, which has no load and just a 0.57 percent expense ratio.
