A:

Mutual funds charge management fees to cover their operating costs, such as the cost of hiring and retaining investment advisors who manage funds' investment portfolios and any other management fees payable not included in the other expenses category. Management fees are commonly referred to as maintenance fees. Management fees are embedded in the expense ratio that mutual funds charge shareholders along with other legal and administrative fees. Management fees vary depending on a fund's efficiency at running its business and the profile of the portfolio.

Components of Management Fees

Because a mutual fund is like any other business, it incurs expenses to maintain its operations. Management fees represent expenses that are paid out of a mutual fund's assets for managing the fund's investment portfolio. The cost of hiring managers is the largest component of management fees; it can range between 0.5 and 1% of the fund's assets under management, or AUM. Even though this percentage amount seems small, the absolute amount is in millions of U.S. dollars for a mutual fund with $1 billion of AUM. Depending on the reputation of management, highly skilled investment advisors can command fees that push a fund's overall expense ratio quite high.

Management fees can also include administrative expenses that are not part of the other expenses category. These administrative costs include record-keeping fees, customer service relations, various office supplies and other miscellaneous expenses. As of 2015, there is a trend of cutting administrative costs and improving efficiency, as mutual funds face increasing competition with exchange-traded funds, or ETFs.

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