Mutual Fund Fees: A Guide for Beginners

How do you select your mutual funds from among the thousands on the market? Three key words: Follow the fees.

Besides understanding how mutual funds work to help build the best portfolio for you, a little understanding of mutual fund fees can go a long way toward building your retirement savings. As the Securities and Exchange Commission warns: “Even small differences in fees from one fund to another can add up to substantial differences in your investment returns over time.”

» Ready to get started? Here’s our list of the best brokers for mutual funds

Two broad types of mutual fund fees

Mutual fund fees generally fall into two big buckets:

• Annual fund operating expenses: Ongoing fees toward the cost of paying managers, accountants, legal fees, marketing and the like.

• Shareholder fees: Sales commissions and other one-time costs when you buy or sell mutual fund shares.

The details on these can be found in a mutual fund’s prospectus, a legal document that each mutual fund is required to file with the SEC. Find the document on the fund’s site and then search for the terms “annual fund operating expenses” and “shareholder fees.”

» Learn more: Understand the different types of mutual funds

Annual fund operating expenses

Ongoing fund operating fees are unavoidable — you’ll have to pay something to keep the lights on at the fund’s management offices — but different kinds of funds require different overhead costs. These fees, also known as mutual fund expense ratios or advisory fees, typically are between 0.25% and 1% of your investment in the fund per year.

Generally speaking, if the fund is actively managed to try to beat average stock market returns, these costs are higher than for passively managed funds such as index funds, which aim only to mirror the returns of a benchmark stock index such as the S&P 500.

» More: Index funds vs. mutual funds

To find these costs, look on the prospectus for the fund’s “total annual operating expenses.” Listed ongoing costs may include:

• Management fees: The cost to pay fund managers and investment advisors.

• 12b-1 fees: Capped at 1%, these fees pay for the cost of marketing and selling the fund and other shareholder services.

• Other expenses: These may include custodial, legal, accounting, transfer agent expenses and other administrative costs.

The total annual fund operating expenses are expressed as a percentage of the fund's net average assets.

» How do fees impact returns? This mutual fund calculator can help

Shareholder fees

These expenses may include:

• Sales loads: These are commissions you pay when you buy or sell mutual fund shares. More on this below.

• Redemption fee: Funds may charge this fee if you sell shares within a short period of time after purchasing them. That could include “anywhere from a few days to over a year” depending on the fund, according to the Financial Industry Regulatory Authority.

• Exchange fee: A fee some funds charge shareholders if they exchange (or transfer) shares to another fund offered by the same investment company.

• Account fee: A fee charged to maintain your account, often if your balance falls below a specified minimum investment amount.

• Purchase fee: A fee paid to the fund at the time of purchase (distinct from a front-end sales load, which is paid to the broker for selling the fund).

» Dive deeper: Understanding investing fees and commissions

Shareholder fees: Load funds vs. no-load funds

As the name implies, load funds impose "sales loads," or commissions that you pay to third-party brokers when you buy and sell shares. The commissions are calculated as a percentage of the amount you’ve invested in the fund. A fee paid at the time of purchase is called a “front-end load,” while a fee paid at the time of sale is (you guessed it) a “back-end load.”

Funds that don't set sales loads are called no-load funds.

Brokers may also charge transaction fees for buying or selling mutual funds. Transaction costs are typically charged as a flat fee that can range from $10 to $75. As more investors look for low-cost ways to grow their investment portfolios and reduce costs, more brokers are offering no-load and no-transaction-fee mutual funds. For example, E-Trade and Charles Schwab each offer more than 4,000 no-transaction-fee funds.

Important note: Even if the mutual fund doesn’t set sales loads, it still may charge redemption, exchange, account and purchase fees.

Load funds and mutual fund share classes

Sales loads are assessed depending on what “class” of shares you buy:

• A-class shares have a front-end sales load, typically between 2% and 5% of total investment.

• B-class shares have a back-end sales load (also known as a “contingent deferred sales charge,” or CDSC), which you don’t pay unless you sell your shares before a specified time period, usually up to seven years after the original purchase. Investors are charged on a sliding scale depending on how soon they redeem shares after original purchases, so it pays to stay invested. B-class share funds typically charge higher ongoing annual fees than A-class share funds.

• C-class shares may carry commissions charged every year you own the fund or they may have a back-end sales load similar to B-class shares.