When an investor invests his money in any mutual fund scheme, he has to pay certain charges. It is extremely important to have the knowledge of the cost you need to pay while diving into the sea of mutual fund investments. The mutual funds are the kind of investments which involve outside distributors who professionally manage your funds and monitor the stocks. This may cause some additional charges and also involve a broker fee. It is necessary to be clear about all the expenses you have to make while investing in a mutual fund scheme. It is important to understand where and why you are spending your money. Here are some details of the overall cost you need to pay while investing in mutual funds for a better understanding of the beginners.
The cost involved in mutual fund investments can be broken down into two categories:-
- The Expense Ratio (Ongoing expenses)
- The Loads (Shareholder fee)
The Expense Ratio-
The management expense ratio is basically the ongoing expense which is not paid by the investors directly and charged out of fund assets. These are mainly the cost which is deducted from the total returns that are gained by the investor so they are paid indirectly. It depends upon the fund assets that are used to gain the good returns and the investor have to pay the fee for it by getting the reduced amount of returns. These expenses can vary from scheme to scheme and it includes the following charges explained below.
- Management Fee: This fee is also known by the name of hiring cost. The amount to be paid under this expense is between an average of 0.5% to 2% of the total assets. This may look like a minimal amount, but they are responsible for most of the top earnings of the nation’s stock. It is a myth that the higher expenses of a fund will provide you a better result, in fact, the less expensive fund has the ability to provide better results. It depends on the portfolio manager that how easily he can beat the market.
- 12b-1 Fee: This is the last part of the expense ratio and also known as distribution and service fee. This is the expense that an investor has to pay as the brokerage and commission. This cost is also used by the portfolio manager for advertising and promotion purposes. There are a few transaction charges that are made by the portfolio manager while selling or buying holdings. This leads to higher costs in the funds that are more active as compared to those who have less buying and selling activities.
- Account Fee: This is the fees that are charged when a fund falls below the minimum balance as a maintenance fee and it is charged only to the small shareholders.
The investors reach the market through the brokers and other marketers and gain their returns, but these people also have any sales commissions that are collected from the investor itself. These sales commissions are also known as the Loads or the shareholder fees. This fee covers all the costs that are associated with the process of buying and selling funds and are charged directly to the fund holder.
- Sales Loads: These are the costs that are charged either at the time of purchase or at the time of sale and they are basically the broker’s commission. If they are paid at the time of purchase then they are called as Front-end loads and if they are paid at the time of sale then called the Back-end loads.
- Redemption fee: This is the fees that an investor has to pay if he wants to redeem his mutual funds, i.e. if he wants to sell his share in the funds.