DEFINITION of 'Costs And Expenses'

Costs and expenses are the expenses associated with running a mutual fund. Costs and expenses are among the principal criteria for judging the investment quality of a mutual fund. Funds that are passively managed tend to have lower costs and expenses compared with their actively managed counterparts. The "expense factor" is a key determinant of a fund's investment return to shareholders.

BREAKING DOWN 'Costs And Expenses'

As with any business, it costs money to run a mutual fund. There are certain costs associated with an investor’s transactions (such as buying, selling or exchanging mutual fund shares), which are commonly known as “shareholder fees,” and ongoing fund operating costs (such as investment advisory fees for managing the fund’s holdings, marketing and distribution expenses, as well as custodial, transfer agency, legal, accounting and other administrative expenses).

What Costs and Expenses Pay For

Some funds may cover the costs associated with your transactions and your account by imposing fees and charges directly on you at the time of the transactions. In addition, funds typically pay their regular and recurring fund-wide operating expenses out of fund assets. Because these expenses are paid out of fund assets, you are paying them indirectly. It is important to understand that mutual funds do not impose these fees and expenses arbitrarily. Rather, the fund’s board of directors is responsible for overseeing the fund’s operations and management. The fund’s directors, and its independent directors in particular, function as “watchdogs” who are supposed to look out for the interests of the fund’s shareholders. One of the most significant responsibilities of a fund’s board of directors is to negotiate and review the advisory contract between the fund and the investment adviser to the fund, including fees and expense ratios.

Impact of Costs and Expenses

Costs and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns. Even small differences in fees from one fund to another can add up to substantial differences in your investment returns over time.

The more you pay in fees and expenses, the less money you will have in your investment portfolio. And these fees and expenses really add up over time.

Types of Costs and Expenses

Shareholder Fees

The following fees may appear as shareholder fees:

  • Sales Loads
  • Sales Charge on Purchases
  • Deferred Sales Charge
  • Redemption Fee
  • Exchange Fee
  • Account Fee
  • Purchase Fee

Annual Fund Operating Expenses

The following may appear as annual fund operating expenses:

  • Management Fees
  • Distribution (and/or Service) 12b-1 Fees

Other Expenses

The following may appear as other expenses:

  1. Expense Ratio

    The expense ratio is a measure of what it costs an investment ...
  2. Total Annual Fund Operating Expenses

    Total annual fund operating expenses are a fund's costs, such ...
  3. Gross Expense Ratio - GER

    The gross expense ratio (GER) is the total percentage of a fund's ...
  4. Exchange Fees

    Exchange fees are a type of investment fee that some mutual funds ...
  5. Total Expense Ratio (TER)

    The total expense ratio expresses the costs necessary to run ...
  6. Redemption Fee

    A redemption fee is a fee charged to an investor when shares ...
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