Fees Charged by Investment Companies
Investment companies charge investors a wide assortment of fees. Mutual funds that are just coming to market, for example, may set the price for the initial sale of shares slightly higher than the shares' NAV to help defray start-up costs.

Sales Fees:
Frequently, funds charge some sort of sales fee or "load". A front-end load is a sales commission charged to investors when the shares are purchased. A back-end load, or redemption fee,is charged to investors when theysell shares and exit the fund.

Ostensibly, these fees help reduce the frequency of trading in and out of the fund and encourage investors to maintain their positions. Although these are one-time charges, it makes sense to look at them in terms of an investor's time horizon. So, for example, a front load fee of 4.8% on a $10,000 share purchase ($480) translates to a per-year cost of $160 when an investor holds the shares for only three years ($480/3). If the investor holds the shares for 10 years, however, his cost per year is only $48. To make fee comparisons easy, services such as Morningstar calculate the cost of buying and holding $10,000 of a fund's shares over three-, five- and 10-year time horizons. Sales commissions provide an incentive to the sales force but they can seriously impact investors' total return.

Funds also charge annual fees to cover operating expenses, management and distribution costs.

  • Management fees are fixed fees that a mutual fund manager charges investors for her services and work with the fund. They are usually categorized as administrative fees or management fees.
  • 12B-1 fees allow a mutual fund to collect a small fee from investors. This fee is designated for promotions, sales, or any other activity connected with the distribution of the fund's shares. The fee must be reasonable: 0.5% to 1% of the fund's net assets and up to a maximum of 8.5% of the offering price per share.


In choosing between two funds with similar features and performance, the fund with the lowest total fees will always be more appealing to investors. One way to compare fees is to look at the fund's expense ratio. This is presented in the annual report as well as in the prospectus. Average fees vary according to asset class: bond funds typically have a lower expense ratio than U.S. stock funds which, in turn, generally charge less than international stock funds.



Investment Strategies

Related Articles
  1. Financial Advisor

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  2. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  3. Investing

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  4. Investing

    A Guide To Investor Fees

    Fees are one of the most important determinants of investment performance and something that every investor should know.
  5. Investing

    Investors: Your Fees Are Probably Too High

    The lower your fees, the higher your returns. Here's how to find out if you're paying too much for your investments.
  6. Financial Advisor

    Investment Fees: How to Understand Them

    There can be a variety of fees levied when investing. Here's a look at what they are and how to manage them.
  7. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  8. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  9. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
Frequently Asked Questions
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The concept of CAGR is relatively straightforward and requires only three primary inputs: an investments beginning value, ...
  2. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, ...
  3. What is the difference between Communism and Socialism?

    Learn how some countries are incorporating socialist methods into capitalism.
  4. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ...
Trading Center