Watch Those Mutual Fund Fees

Mutual funds can be great investments, freeing you from having to research lots of investments and decide when to buy or sell them. Avoid funds with excessive fees, though, in order to let your investment grow as much as possible. Here are some key fund fees to know about:

When you buy shares of a mutual fund, you may be charged a load, which is a sales fee — essentially a commission paid (from your money) to the person who sold shares of the fund to you. Loads are often charged when you buy, but are sometimes charged when you sell or on an annual basis. They can be as high as 8.5%, which would take a huge bite out of your money. Most mutual funds these days are no-load, so it’s not hard to avoid paying them. Some fund companies also charge fees if your account falls below a certain level, if you want to move money from one fund to another or if you want to sell your shares.

There are also ongoing fees that mutual funds charge you as long as you hold your shares. These include 12b-1 fees and a management fee. The 12b-1 fee, often 0.25%, covers marketing and advertising costs, which could actually hurt you. If it results in too much more money flowing in, it can be hard for its managers to find enough good investments that align with their investing style.

The management fee is there to compensate the managers of the fund — no matter how well or poorly they perform. These two fees are combined in the fund’s “expense ratio,” which is an overall annual fee meant to cover operating costs. As of 2019, the average asset-weighted expense ratio paid by investors for stock mutual funds was 0.52%, down from 0.99% in 2000. That’s just an average, though — many funds charge significantly more, and it’s generally best to avoid those funds.

To minimize fees, consider sticking with low-cost broad-market index funds, some of which charge less than 0.10% annually.