Funds offer plenty of benefits to busy investors. Here's a quick review of what they'll cost you.
Some mutual funds impose a sales charge when you purchase shares. These loads are essentially commissions that pay the professional adviser or broker who sold you the fund. There are also thousands of other no-load funds. They market directly to the public and have no salespeople. If you choose to research and invest in funds on your own, there is no need to pay this commission.
Sometimes the mutual fund tables in newspapers show two prices: the net asset value or "bid" price (the price at which the fund will buy a share back from a shareholder), and the "offering" or "asked" price at which you can buy a share. The offering price includes the maximum sales charge. With no-load funds, the bid price is identical to the asked or offering price.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Front-End Loads
These charges hit you before your money is even invested and can cost you more than you think. Loads can vary greatly, but 5.75% isn't unusual. If you invest $1,000 in a fund charging a 5.75% load, for example, $57.50 will be subtracted up front and $942.50 will be invested in the fund's shares. A 5.75% sales charge thus works out to about 6.1% of your net investment.
Deferred or "Back-End" Loads
These fees are deducted from your account if you redeem shares before a specified period elapses. The amount of the charge and any conditions under which you may be exempt should be explained in the prospectus, but the language may be confusing.
A key point to check is whether your entire interest in the fund or just the amount you originally invested is liable to a deferred charge. If increases in net asset value, capital-gains distributions or dividends are exempt, you know going in the maximum charge you face and that your profits are shielded.
Redemption Fees
Slightly different from deferred loads, redemption fees are more worrisome if you are investing for capital gains rather than dividend or interest income. A redemption fee is levied against the net asset value when you sell, so it nips profits as well as the amount you invested.
Marketing Fees
Many funds take a special deduction from assets for advertising, marketing and other expenses, including commissions paid to brokers. These charges are called 12b-1 fees. If a fund charges no sales fee but levies a 12b-1 fee that is greater than 0.25% of assets, by law it can't call itself a no-load fund.
Management Fees
The fund's professional managers are paid an annual fee, commonly 1% or so of the fund's average assets but sometimes much more. (Fees tend to be higher for stock-oriented funds than for bond-oriented funds.) Some funds use an incentive system, periodically adjusting the fee according to the fund's performance compared with the stock market as a whole: The better the performance, the higher the fee. Nevertheless, all funds charge a management fee.
QUIZ: Test Your Investing IQ
The best way to compare management and 12b-1 fees between funds is to look at their expense ratios. These figures are calculated by totaling the management and 12b-1 fees (but not loads) and dividing them by the fund's total assets.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
-
Kiplinger Special: How Businesses Should Budget for 2025Kiplinger Forecasts From fuel to AI software subscriptions, here's what you can expect to pay next year.
-
Intel Braces for an Even Tougher Road AheadThe Kiplinger Letter Amid a long, costly turnaround, Intel resets expectations again. Its new woes raise questions about U.S. industrial policy and global chip competition.
-
Kiplinger Special: The Long-Term Future of the U.S. Economy
The Kiplinger Letter Kiplinger's report into what it will take the U.S. to maintain a healthy economic growth rate.
-
Fed Rate Cuts Still on HoldThe Kiplinger Letter With inflation stubbornly elevated, the Federal Reserve will keep interest rates high for now.
