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:

RELATED TERMS
  1. Expense Ratio

    The expense ratio is a measure of what it costs an investment ...
  2. Mutual Fund

    Mutual funds combine money from many investors to invest in a ...
  3. Total Expense Ratio (TER)

    The total expense ratio expresses the costs necessary to run ...
  4. After Reimbursement Expense Ratio

    An after reimbursement expense ratio is the same as a net expense ...
  5. Load-Adjusted Return

    A load-adjusted return is the investment return on a mutual fund ...
  6. Trailer Fee

    A trailer fee is a fee that a mutual fund manager pays to a salesperson ...
Related Articles
  1. Investing

    Mutual Fund Fees: Here's What You're Paying For

    It is important to understand mutual funds fees so that you know what you are paying and to whom, and how that impacts your portfolio returns.
  2. 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.
  3. Investing

    Mutual funds: Management fees versus MER

    Having a clear understanding of the fees charged by a mutual fund is a significant component to making an informed investment decision.
  4. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  5. 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.
  6. Investing

    If You Invest in Mutual Funds, Read This

    If you invest in mutual funds, you may be paying investment expenses that don't appear on your statement.
  7. Managing Wealth

    How To Optimize Your Portfolio and Reduce Fees

    Investment fees aren't avoidable altogether, but there are strategies investors can employ to keep those fees at bay and reduce the impact on returns.
  8. Investing

    ETFs: Exploring Expenses in 2016 (BLK, ITOT)

    Take a good look at the latest trends in ETF costs. While passively managed funds have become less expensive, actively managed funds have not.
  9. Investing

    Why Are ETF Fees Lower Than Mutual Funds?

    Discover all the reasons ETFs typically have lower fees than mutual funds, including their passive management and the absence of load and 12b-1 fees.
Trading Center