Charges are the most talked about fees that mutual funds charge. A “load” on a mutual fund is just another way of saying that the fund charges a sales commission for buying, selling, or both. There are funds that charge charges and there are funds that do not charge charges (known as “loading funds” and “no-load funds” respectively).
Initial charges are sales commissions that are paid in advance at the time of purchase. So if you give a fund an investment of $ 10,000 and charge a 5% initial charge, then the fund will take 5% of your investment (that’s $ 500) and pocket it right away. Only what’s left after the load has been deducted will be invested in the fund (in this example, only $ 9,500 is invested in the fund from your initial investment of $ 10,000)
Back-end uploads collect your sales commissions when you sell (or “redeem”) your shares. So when you go to redeem your shares in a fund with a fund load, you end up receiving the money the shares are worth minus the sales commission.
Mutual funds charge management fees to pay for management services used to manage the fund. In other words, these fees are used to pay the salaries of the fund’s administrators and analysts. Management fees typically amount to no more than one percent of the fund’s assets and are significantly lower for passively managed funds, such as index funds, than for actively managed funds. You must remember that a high management fee in no way guarantees a more skilled management team.
Front loads can be reduced if you are investing or planning to invest a certain amount of money. Load shedding programs are called “breakpoints.” For example, with most fund companies, if you are investing more than $ 100,000 or planning to do so within the next 13 months, you will get a 1% reduction in your initial load. The more you invest, the greater the load reduction. For some fund companies, the break point reduction starts at $ 50,000 over 13 months, and with many funds, if you invest more than $ 2 million, there is no initial charge.
If you don’t have $ 50,000 or $ 100,000 to invest in the next 13 months, you can still get a reduction in your initial charge, through “accumulation rights.” Under the accumulation rules, you will receive rate reductions on the initial load when your total investments with a fund family have exceeded the breakpoints. So if you only have $ 20,000 to invest today that’s fine, someday you will soon grow beyond the initial break point of $ 50,000 or $ 100,000 and be eligible for the load discount on your additional investments.
A mutual fund’s turnover ratio can give you useful information about how expensive a fund is and how it’s managed. Turnover ratios measure the amount of business activity in the fund’s portfolio. They are calculated by taking all of the fund’s sales over a specified period of time (usually one year) and dividing them by the fund’s total assets. This number tells you how much the fund’s portfolio has changed.
You probably want to be careful when investing in a fund with a high turnover rate. High turnover means that the fund manager is buying and selling very frequently and, since every sale and every purchase involves a commission, this means that funds with high turnover rates tend to have high expenses. Some experts recommend focusing on funds with a turnover rate of less than 50%.
Copyright 2006 Michael Saville
