Understanding Fees: Don?t Get Fed a Load

Some form of charges apply to every variety of mutual fund. Here’s a quick rundown on load lingo:

Load — A sales charge paid by an investor who buys shares in a load mutual fund or annuity.

Loaded fund — A mutual fund that is sold for a sales charge by a brokerage or other sales representative.

Front-end load — A sales charge applied to an investment at the initial time of purchase. Most front-end loads also apply every time money is reinvested. Load fund investors pay this charge to broker dealers and fund managers in lieu of a commission. It generally runs 4.5-5.0 percent of investors’ assets.

Back-end or Rear-end load — A sales charge paid by load fund investors for making a withdrawal within a certain time frame, generally five years. Also called deferred sales charge, exit fee or redemption charge.

Management fee — A recurring charge against investors’ assets for professionally managing their portfolios as well as for such services as shareholder relations and administration. Generally runs 0.5-2 percent of a shareholder’s assets.

Exchange fee — A charge for switching funds. Often, if a shareholder moves money within a fund family, the transaction is exempt.

12b1 charges — Similar to an advertising and promotions tax, these recurring fees accompany many mutual funds and are expressly used for marketing and promotional expenses of the fund, its managers or sometimes even the dealers who sell it. Often, 12b1 charges run in the 0.75 percent range.

Expense ratio amount — All the recurring fees shareholders pay, generally annually, as a percentage of their overall mutual fund investment amount. It includes management, exchange and 12b1 fees and may be used for shareholder services, salaries for money managers and administration staffs, and investor centers. Collectively may be as low as 0.2 percent or more than 2 percent of shareholder assets.

No-load fund — A mutual fund offered by an open-end investment company that does not impose sales charges on its shareholders. Investors buy shares directly from the fund companies rather than through a broker, but do not receive advice on when to buy or sell. Often, redemption fees are imposed similar to rear-end loads if shares are sold within a certain time frame. Another hidden “fee” can be the tax liability on large holdings within the funds.

Low loads — Small percentage charges increasingly imposed on traditional no-load funds like front-end loads, but with no upgrade in services.

Turnover — The volume of shares traded as a percentage of total shares listed in the fund during a period. The more frequently a fund’s stocks are bought and sold, the more fees and higher tax liabilities are involved for shareholders.

Source: Barron’s Dictionary of Finance and Investment Terms