Mutual fund fees are an amount of money that mutual funds charge in order to cover certain expenses. Most of the time, investors will have to pay a sales load when they purchase shares of a fund. In addition, they will have to pay an expense ratio that covers the fund managers' salaries as well as other administrative costs. Other mutual fund fees that could be charged include distribution fees and redemption fees.
Most mutual fund fees are charged in order to keep the mutual fund in operation. One of the first mutual fund fees that an investor will be charged is the sales load. A sales load is a certain percentage of the purchase price, and it works like a commission. Brokers who sell shares of mutual funds receive this commission for bringing customers to the fund. Some funds do not charge this fee if an investor purchases shares directly from the mutual fund company.
Instead of charging a sales load at the beginning of the investment, some mutual fund companies charge this fee at the end of a transaction. In such cases, the investor pays the fee when he or she cashes out the shares. This is known as a back-end load.
Another big source of mutual fund fees is the expense ratio. This fee is used to cover the ongoing costs of the fund. While the sales load is usually a one-time fee for the investor, the expense ratio is charged every year. It will generally be quoted as a percentage of the assets in the fund. This money comes out of the profits that are generated from the trading activities of the fund.
A big part of the expense ratio goes toward paying the salaries of the fund managers. The fund managers are in charge of making the investment decisions for the mutual fund. Another portion of the expense ratio goes towards paying for the administrative costs of the fund. For example, part of the money will go to pay for the property that is leased to house the headquarters of the fund. This ratio will cover the costs of customer service personnel, legal fees, and any other expenses that are incurred.
Some mutual funds also charge fees for distribution and redemption. This means that an investor could have to pay a certain amount of money to cover the advertising costs of the fund. Redemption fees are sometimes charged in order to discourage investors from selling shares quickly.