What are the Expenses Associated with Mutual Fund Management?

Novices to the world of investment love mutual funds. There is a money manager responsible for the financial health of the property while all the costs associated to having mutual funds are shared among the collective investment investors. That is a good thing, as mutual funds have several expenses associated with managing them, such as investment advisory, marketing, distribution, and shareholder transaction costs. Investors need to know about these costs straight off the bat as it is something they need to pay for and can reduce their earnings.

No two mutual funds are exactly alike and their fees vary from case to case. In general, mutual funds, like any business have an operating budget and the cost for the fees are usually taken out of the overall assets of the account.

There are annual fund expenses that need to be offset by additional charges. According to the SEC these charges may include:

  • “Management Fees — fees that are paid out of fund assets to the fund’s investment adviser for investment portfolio management, any other management fees payable to the fund’s investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the “Other Expenses” category (discussed below).
  • Distribution [and/or Service] Fees (“12b-1” Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares, and sometimes to cover the costs of providing shareholder services. “Distribution fees” include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. “Shareholder Service Fees” are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.
  • Other Expenses — expenses not included under “Management Fees” or “Distribution or Service (12b-1) Fees,” such as any shareholder service expenses that are not already included in the 12b-1 fees, custodial expenses, legal and accounting expenses, transfer agent expenses, and other administrative expenses.
  • Total Annual Fund Operating Expenses (“Expense Ratio”) — the line of the fee table that represents the total of all of a fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets. Looking at the expense ratio can help you make comparisons among funds.”

Regardless of which mutual fund investors may opt to partake in, the Securities and Exchanges Commission require full disclosure. All the fees will be in the written prospectus for any mutual fund.