Cost of Investing in Mutual Funds

Front-End Load

A front-end load is the commission or sales charge paid to the broker when units of Mutual Funds are purchased. Different funds charge differently to collect this. If no front-end load is collected then the Asset Management Company can collect additional management fee every year.

Back-End Load

A back-end load is the fee collected by the Mutual Fund during redemption of units by the investor. This is otherwise known as “exit fee”. These charges are more formally known as Contingent Deferred Sales Charges (CDSC). Many funds start back-end loads at 5% or 6% and reduce them by 1% every year the investor holds the units.

Operating Expenses

Operating expenses include administrative charges and advisory fees paid to the Asset Management Company. These charges are expressed as a percentage of the total Assets Under Management (AUM). Usually these charges range from 0.1% to 2.5% of the assets under management. Operating expenses are not incurred explicitly by the investors. It comes as the reduced value of the portfolio.

12b-1 Charges

Some of the funds (the so-called 12b-1 funds) can pay their commissions to brokers and other distribution expenses like advertising and preparing promotional literatures from the fund assets. The “12b-1 fees” is named after the rule of the Securities and Exchanges Commission (SEC) that allows these funds to do this.  These charges, like the operating expenses, are not incurred directly by the investor. The maximum amount that a fund can use for 12-1 charges is limited to 1% of the average net assets per year.    

Privacy Statement