What is the most common initial cost for a mutual fund investment?
I am not sure if you are asking about the management fees or the amount of money to invest in a fund so I will answer both.
A common management fee for a mutual fund would be 1.25%.
A common minimum investment for an IRA in a mututal fund would be $500.
A common initial ivestment in a regular accoutn would be $1000.
Although I'm not clear on what you refer to as initial cost, I am assuming that your refer to the initial investment required. With Vanguard, one of the lower-cost providers, the intial investment is $3,000. Fidelity's minimum is $2,500 for a taxable account, but only $25 for an Individual Retirement Account. These are reasonably representative, though there are funds such as Schwab Balanced Fund and BlackRock Balanced Capital with minimums of only $100.
Most Mutual Funds have no up front costs. Some do and are referred to as “A class Shares”. These have commissions of up to 5.5%. There is no reason to ever buy a mutual fund that has a commission…EVER.
With some custodians there is a transaction cost to buy a mutual fund. This could be $10 to $49 dollars depending on the custodian. Other custodians have no transaction costs to buy a fund but the custodian may get paid a fee to have the mutual fund on their platform.
The most common initial or upfront cost of a mutual fund depends on what share class you buy. Class A are considered upfront or loaded funds, therefore this would be the most common initial cost. I have listed the other share classes below:
- Class A mutual fund shares generally have front-end load or sales charge. Class A shares are best for investors who plan to invest larger dollar amounts and will buy shares infrequently. If the purchase amount is high enough, you may qualify for breakpoint discounts. And may also have exchange privileges within a mutual company's family of funds.
- Class B shares are a share class of mutual funds that do not have up front sales charges, but instead charge a contingent deferred sales charge or back end load. Class B shares also tend to have higher 12b-1 fees than other mutual fund share classes. If an investor purchases mutual fund Class B shares, they will not be charged a front-end load but will instead pay a back-end load if the investor sells shares prior to a stated period, such as 7 years. Class B shares can eventually exchange into Class A shares after seven or eight years. This class may be best for investors who do not have enough to invest to qualify for a break point on the A share, but intend to hold the B shares for several years or more.
- Class C Share mutual funds charge a level load annually, which is usually 1.00%, and this expense never goes away, making C share mutual funds the most expensive for investors who are investing for long periods of time. There may also be 12b-1 fees. A shares or B shares are better for investment time horizons of more than a few years. C shares are best for short-term (less than 3 years) and use A shares for long-term (more than 8 years), especially if you can get a break on the the front load for making a large purchase. Class B shares can eventually exchange into Class A shares after seven or eight years.
- Class D mutual funds are often similar to no load funds in that they are a mutual fund share class that was created as an alternative to the traditional and more common A, B or C share funds that are either front load, back load or level load.
- Adv share class mutual funds are only available through an investment advisor, hence the abbreviation "Adv." These funds are typically no-load but can have 12b-1 fees up to 0.50%. If you are working with an investment advisor or other financial professional, the Adv shares can be your best option because the expenses are often lower.
- Inst funds (Class I, Class X, Class Y or Class Y) are generally only available to institutional investors.
- Load waived funds are mutual fund share class alternatives to loaded funds, such as A shares. The load is waived, these funds are offered in 401(k) plans where loaded funds are not an option. Load waived mutual funds are identified by an "LW" at the end of the fund name and at the end of the ticker symbol.
- R share mutual funds do not have a load (ifront end, back end, or level load) but they do have 12b-1 fees that typically range from 0.25% to 0.50%. If your 401(k) only provides R share class funds, your expenses may be higher than if the investment choices included the no load or load waived version of the same fund.
The upfront fee for Class A shares varies with each mutual fund company. Using the services of a financial advisor could help identify which fund is best for you and your personal financial situation.
Please see the attached article on buying mutual funds below:
There is a common belief that investing in mutual funds is a conservative way to accumulate wealth in the stock market. We have all seen the cover of financial magazines that read: “Our 100 Best Mutual Funds for 2017.” Yes, magazine companies are in the business of selling their magazines.
If you are looking at whether or which fund to buy you usually look at its track record or performance history. Although we all know at the bottom of every mutual fund brochure is the disclaimer: "Past performance is not indicative of future results." Since most investors are dazzled by performance, I beg to differ. (For more, see: How Mutual Fund Companies Make Money.)
The first question should be: What are the costs? The annual cost of owning a mutual fund is called the expense ratio. There is also a separate charge called the sales load which I will cover later. The expense ratio is the percentage of the fund’s assets that go toward running the fund. But there are three additional components to be aware of:
- Management fees
- Administrative costs
- 12b-1 fees
Management fees or investment advisory fees go to pay the portfolio manager. You know it keeps up his Hampton beach house. Seriously, that is how he gets paid as well as from firm bonuses.
Administrative costs are for operating expenses like recordkeeping, client mailings, maintaining a customer service phone line, etc. These vary with the size of the fund.
Lastly, there is the 12b-1 fee. This fee is for marketing and advertising. Think about this fee when you see your fund advertised during Super Bowl half time. It also includes trailer commissions paid to the broker of record as an incentive to sell the fund. It works like an annuity for the sales person over the life of the fund. It is usually paid to the broker quarterly as it is taken out of the net asset value of the fund fractionally. I have even seen some funds that are closed to new investors and are still charging 12b-1 fees. (For more, see: 12b-1: Understanding Mutual Fund Fees.)
Regarding the sales load, mutual funds come in different share classes and this will determine whether you pay an up-front, back-end, contingent deferred sales load or no-load. The expense ratio usually differs with which share class you buy. Sounds confusing, doesn’t it? That is the way the mutual fund industry prefers it.
The bottom line is that these fees are rising as funds shift away from the up-front loads that are driving away sales and into the annual expense ratios where they are not as detectable. And these fees are charged every year whether or not the fund has performed. I have seen mutual fund holdings that have been held for years and the only one who has profited is the mutual fund company.
The other issue with mutual funds is the high turnover of assets in the fund. Buying and selling stocks have transactional costs which cut into the net return. A fund with a high turnover will end up distributing yearly capital gains to their shareholders and that will generate a tax bill for the investor thereby reducing net returns.
Additionally, mutual funds are required to maintain liquidity and the capacity to accommodate withdrawals. Funds typically have to keep a portion of their portfolio as cash. The funds are keeping cash balances of usually around 8% of the fund, which is not generating any returns. The average fund is charging around a 1.5% expense a year on the 8% that it is keeping in cash.
Mutual fund companies aggressively market funds awarded 4 or 5 stars by rating agencies. But the rating agencies merely identify funds that have performed well in the past. It provides no help in finding future winners. Historically, mutual funds have not outperformed the market. Research indicates that around 72% of actively-managed large cap funds failed to outperform the market over the last 5 years.
Mutual Fund Alternatives
There are alternatives to mutual funds that are structured differently and will also give you diversification. Unit investment trusts (UITs) are a fixed portfolio of securities usually with a 12 to 24 month term, therefore, no annual expenses only an upfront commission. Additionally, exchange-traded funds (ETFs) offer diversification and liquidity with lesser fees relative to mutual funds.
The bottom line is that mutual funds are not always the safe haven that they have been touted. The companies that manage mutual funds face a fundamental conflict between producing profits for their owners and generating superior returns for their investors. The best way to evaluate a fund is by digging a bit deeper into the fees and also looking at the turnover ratio prior to investing. It is important to understand the good and bad points. The probability of a successful portfolio increases dramatically when you do your homework. (For more, see: Mutual Funds: The Costs.)
It varies from fund to fund and share class to share class. Some mutual funds will charge a sales charge when you purchase it that can be 1,2,3,4 or 5% depending on the amount. Some funds don't charge anything upfront, but may have high annual expenses. Other funds may have a surrender charge if you liquidate before the schedule expires. It just all depends.