Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

CHAPTER 4

Mutual Fund Fees and Expenses

DAVID M. SMITH, Ph.D., CFA Associate Professor of Finance and Director of the Center for Institutional Investment Management, the University at Albany (SUNY)

 

 

 

The fees and expenses paid by mutual fund investors take multiple forms. Some charges are deducted from the fund’s value in clear view of the investor. For other charges, the amount is disclosed yet they are deducted out of the investors’ sight. The magnitude of certain charges is essentially invisible to fund investors.

The total monetary costs paid by mutual fund investors include front-end and deferred loads, operating expenses, account fees, and trading costs. The expense ratio consists of management fees, Rule 12b-1 fees, and “other” expenses. “Other” expenses may include transfer agent fees, securities custodian fees, shareholder accounting expenses, legal fees, auditor fees, and independent director fees. Some of the account fees investors bear can include switching fees, redemption fees, and account maintenance fees. Trading costs include brokerage fees, bid-ask spreads, and market impact costs.

The purpose of this chapter is to describe the various fee and expense categories associated with mutual funds and their consequences for investors.

LOADS

Mutual fund loads come in two main forms: front-end loads and deferred loads. Front-end loads are paid when the investor initially buys shares of the fund. Deferred loads, also known as contingent deferred sales loads or back-end ...