njcpafirm.com: Understanding Mutual Fund Fees

Understanding Mutual Fund Fees

Are you overlooking the value of keeping your savings in a mutual fund? Americans have nearly $12 trillion invested in mutual funds, according to the Investment Company Institute. Mutual funds let you buy into a diverse pool of investments, including short-term securities, stocks and long-term bonds, among others. Your risk is spread among a number of investments, which is less volatile than investing in just one company. There are typically charges associated with any investment, however, and that’s also true of mutual funds. When choosing the best investment for you, you need to understand those fees and how they will affect your investment, advises the New Jersey Society of Certified Public Accountants (NJSCPA).

Load Versus No Load
Load funds charge a commission, while no-load funds are commission-free But be advised, load funds may also levy other charges, including purchase, redemption and account fees, and some no-load funds also charge fees. As such, review exactly what costs are involved when deciding which funds to invest in.

Where to Find Information
To learn about the costs related to load and no-load funds, read the fund’s prospectus, a brochure that provides all of the fund’s information. Each prospectus has a section on shareholder fees that details transaction charges, such as buying or selling fund shares.

In addition, funds typically use fund assets to pay their own expenses. So even though they aren’t charging you directly for these costs, they are being deducted from the fund’s overall balance — including your portion of it. The prospectus includes a section on operating expenses, outlining your costs. These may include management fees, distribution fees and other related expenses. The prospectus will also show the annual operating expenses expressed as a percentage of the fund’s average net assets.

Making Comparisons
Many of the figures you find in a prospectus may not make sense on their own, but they will come in handy for comparisons with other funds. Remember, a fund may still be a good investment even if it has slightly higher fees than another choice that you’re considering. However, over time, the fund with higher fees must perform better than a lower-priced fund in order to generate the same net returns.

Tools You Can Use
The Securities and Exchange Commission website has mutual fund calculators that you can use by going to www.sec.gov and clicking on Calculators under Investor Information. In addition, a calculator on the Financial Industry Regulatory Authority website allows you to compare the expenses of up to three funds or share classes of the same fund. You can find it at www.finra.org, under Investor Tools.

Don’t Forget Your 401(k)
The mutual funds that are included in your employer’s 401(k) plan also have their own fees. It’s a good idea to review them to ensure that you understand how they will affect your 401(k) investment. If your employer offers a choice among several 401(k) funds, you may find that the fees involved could affect which one you pick.