Sales fee or load
that may be payable at the time of investment (front-load) or when the
investor exits from the fund (back-load). For example, a fund with a 5%
load must earn more than 5.25% yearly just to break even. Some are no-load
funds, but...
Management fees take
the place of the sales fee in a no-load fund, but these fees may be
higher, although several no-load funds charge low fees.
12b-1 fee pays for
advertising, marketing, and distribution. This fee, ranging from 0.25% to
1.00%, is supposed to help investors because, in theory, if more investors
come in, shareholders would have to pay lower per-share operating costs.
Brokerage costs are
incurred when the fund buys and sells bonds and stocks in its portfolio.
The more the fund manager trades, the higher the costs will be.
Taxes paid by the
fund, because buying or selling stocks and bonds may generate taxable
capital gains. Taxes reduce the fund’s returns.
The prospectus should show clearly the costs that are deducted from the
fund’s assets since these will reduce returns.
Turnover shows the percentage of a fund’s holdings (stocks and bonds
in its portfolio) that change every year through buying and selling. Turnover
is the gross proceeds from all sales divided by the total assets in the mutual
fund. Mutual funds have an average turnover rate of 85%. If the turnover ratio
is more than 100%, the fund manager does a lot of buying and selling, which
incurs brokerage costs and brings down the fund’s returns.
Given these features, which mutual fund is the favorite of investors?
Most investors prefer index funds due to their low turnover, lower costs
and, since these mimic the stock market, the best combination of moderate risk
and market returns.
A final tip: Never buy mutual funds at the end of the year. Mutual
fund distributions are typically given toward yearend, in November or December.
Buying a mutual fund toward the end of the year may therefore incur a quick tax
bill along with their fund shares. When buying a mutual fund, find out when it
will make its end of the year distribution and only buy shares after that date.