Mutual Fund Expenses and Fees
Like any business, running a mutual fund involves costs too. These costs are in connection with maintaining transactions of investors such as purchases, exchanges and redemptions. Besides, in mutual fund expenses there are operating costs of the fund which are overall costs for maintaining the fund and not related to any one particular investor such as advisory fee, marketing and distribution expenses, brokerage fee, transfer agency fee, legal and accounting fee.
Fund Operating Expenses
For certain direct expenses, the investor is charged directly at the time of the transactions. These charges and fees are usually declared in a table in the fund prospectus. However, there are some mutual fund expenses which are operating expenses and happen at regular intervals, irrespective of the number of investors in a fund. These expenses are paid out of the fund assets and are mentioned in the fee table in the prospectus under the heading annual fund operating expenses.
Management fee is a part operating mutual fund expenses to cover administrative expenditure incurred on advertising, brokerage fee, telephone, printing, etc. Distribution fees are also mutual fund expenses paid for marketing and selling of fund shares, compensating brokers and agents who sell mutual fund shares, paying for sending mailers, prospectuses to probable new investors, and printing of sales literature. However, according to government regulatory agencies, these expenses cannot exceed a stipulated percentage of the fund's average net assets per year.
Other mutual fund expenses not included in management and distribution fees are legal expenses, custodial expenses, accounting expenses, transfer age expenses and other administrative expenses. The total annual fund operating expenses are expressed as a percentage of the fund's overall average net assets.
For a fund to perform and do well, the operating costs have to be low. Small differences in fees can exemplify into large differences in returns over a period of time. For example, in an investment of $10,000 earning an annual return of 10% before expenses which is 1.5%, then over a period of 20 years the return would be around $49,725. But, if the fund had a low operating expense of 0.5%, then the investor would end up earning $60,858. Even though the fees and other mutual fund expenses seem like a minor expense, they create a serious drain on the performance over a period of years. It should be clear that mutual fund costs and other fees are detrimental to investment returns.
