It is important to understand mutual fund costs affect your return and, if too high, can cause a fund to have sub-par performance.
Fees can be broken down into two categories:
- Ongoing fees are paid yearly to remain invested.
- Transaction fees (often referred to as a "Load") are paid when you buy or sell shares in a fund.
The Expense Ratio
The ongoing expenses a mutual fund charges are represented by the expense ratio. The expense ratio is composed of the following:
- Fund manager(s) costs, known as the management fee, are between 0.5% and 1.0% of assets on average.
- Administrative costs include necessities such as postage, record keeping, customer service, etc.
- The 12B-1 fees are used to pay brokerage commissions, and to promote the fund.
All together, expenses range from as low as 0.2% for index funds to as high as 2.0%. The average equity mutual fund charges around 1.3% to 1.5%. You'll generally pay more for specialty or international funds that require more expertise from managers.
The Load Fees (There are no Load fees with First Commonwealth
401(k) mutual funds)
Loads are fees used to compensate brokers or other salespeople for their services in selling you the mutual fund. They are hidden in the fund's share price. Here are the details:
- Front-end loads: You pay the fee when you purchase the fund. If you invest $1,000 in a mutual fund with a 5% front-end load, $50 will go to pay the sales charge, and $950 will be invested in the fund.
- Back-end loads (known as deferred sales charges): You pay the back-end load if you sell a fund within a certain time frame. A typical example is a 6% back-end load that decreases to 0% in the seventh year. The load is 6% if you sell in the first year, 5% in the second year, etc. The expense ratios are generally higher in back-end load funds than in front-end load funds to pay the broker when the account is sold.
- A "no load" fund sells its shares without commissions or sales charges.