Investing in mutual funds can often make you feel lost, with an array of complex terminologies, fees and hidden charges. Mutual funds are one of the most popular investments because of the risk avoidance and diversification. However, mutual funds come with fees that require you to really take a hard look at what you’re paying for and they could make you feel frustrated in not knowing what your return will be. We’ll cover everything you need to know about mutual fund fees below but you also may want to have an upfront conversation with your financial advisor so you understand exactly what fees you’ll be paying for.
What Are the Fees in a Mutual Fund?
Mutual fund fees are various costs that funds charge their shareholders to cover the fund’s operating expenses. These fees can cover everything from paying their investment managers, analysts and administrative staff and covering distribution charges, which collectively fund the resources needed to manage and operate the fund. These fees serve as the primary revenue source for the fund and are a vital part of its functioning.
But understanding these fees can feel like trying to decipher an alien language. This is where a good financial advisor comes in. A financial advisor can provide essential insights into these fees’ nature, helping you navigate through them and make informed decisions.
Types of Mutual Fund Fees
Visualize your mutual fund fees as a complex pie diagram divided into two broad categories, annual fund operating expenses and shareholder fees. The portion of the pie that is taken up by each category or type of fee, will vary on the fund and the firm managing that fund.
- Annual Fund Operating Expenses: These are your ongoing expenses for operating the fund, which includes management fees, 12b-1 fees and other expenses including administrative costs such as custodial, legal and accounting fees.
- Shareholder Fees: These are what you directly shell out when buying or selling shares. They comprise front-end sales loads, back-end sales loads, redemption fees, exchange fees and account fees.
This gives you a simple approach to mutual fund fees and helps you better understand what to look out for or what you’ll be paying for. You should speak with either your own advisor or the fund manager to understand where your fees are going and how much you’ll be paying.
How Fund Fees Impact Your Return
It’s easy to think that high mutual fund fees equate to poor investment outcomes. But is it necessarily true? Let’s explore. High mutual fund fees can significantly impact your long-term investment returns. They reduce your investment balance and limit its growth potential over time.
Consider a scenario where you’ve invested $10,000 in a mutual fund with an annual return of 6%. With a fund charging a 1% annual fee, your investment stands at approximately $79,058 after 30 years. However, with a 2% annual fee, your balance would only be $57,434 – a big difference caused by a 1% disparity in fees. That can be quite the hit over time.
While high fees can impact long-term investors significantly, it’s important not to rush to the conclusion that high fees are definitively harmful or that lower fees always mean better returns. Fees are one of the many factors affecting returns.
Reducing Mutual Fund Fees
Understanding mutual fund fees is crucial, but managing them efficiently is a stepping stone to investment success. Here are a couple of ways you can achieve that. One of the best ways is the selection of the mutual fund itself. There are multiple things you can do to reduce the fees you pay in that selection process.
Several low-cost funds like index funds tend to have lower fees than other types of mutual funds. Avoiding funds with sales loads can also help you save significantly as these funds charge a commission when you buy or sell shares. Opting for no-load funds and understanding and comparing different fee structures can provide you with cost-saving investment options.
Cracking the code of mutual fund fees is an empowering step toward maximizing your investment returns. Mutual fund investments may feel like a daunting labyrinth, but with the right understanding of fees and their impact, coupled with professional advice, this labyrinth can turn into a journey of successful investing.
Tips for Investing
- When you’re going through the investment process, you may not know how much you’ll actually be paying in various fees. It’s important to work with a professional that is honest and upfront about everything you’ll pay, which is where a strong financial advisor comes in. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can also use SmartAsset’s free investment calculator to help you see what your portfolio could return based on your asset mix.
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