Though you should never decide on a mutual fund based on fees alone, it’s important to understand the long-term impact of a fund’s fees and expenses. A small difference in fees can make a huge difference in your returns down the road.
There are two types of fees associated with mutual funds: ongoing fees and transaction fees. Under the "shareholder fees" section of the fund’s prospectus, you’ll find both the ongoing fees—which are included in the fund’s expense ratio (cost to operate the fund)—and the transaction fees.
Here’s a breakdown of what’s included in each:
Management fee: This fee is what you pay to the fund manager or the team of investing professionals who make sure the fund achieves its investing objective and performs well. Typically, this fee falls between 0.5% and 2% of the assets being managed.
12b-1 fees: These fees pay for the marketing and selling of the fund. They’re capped at 1% of the fund’s assets and are paid directly out of the fund.
Miscellaneous: These include accounting fees, audit fees, as well as recordkeeping and legal fees.
Transaction fees: These include redemption fees, sales charges and trading fees.
We know that’s a lot to remember, and it can get confusing. That’s one of the reasons we recommend you work with an investment professional. These pros can explain the details and your options in easy-to-understand language.