INVESTOR BULLETIN Mutual Fund Fees And Expenses
INVESTOR BULLETINMutual Fund Fees and ExpensesThe SEC’s Office of Investor Education and Advocacy is issuingthis Investor Bulletin to explain some of the most commonmutual fund fees and expenses. As a general introduction tomutual fund fees and expenses, this Investor Bulletin does notidentify all of the fees that you may pay to buy and own sharesin a mutual fund. This Investor Bulletin will, however, familiarize you with some typical mutual fund fees and expensesand show you how those fees and expenses reduce the value ofyour fund’s investment return.As with any business, it costs money to run a mutual fund.There are certain costs associated with an investor’s transactions (such as buying, selling, or exchanging mutual fundshares), which are commonly known as “shareholderfees,” and ongoing fund operating costs (such as investment advisory fees for managing the fund’s holdings, andmarketing and distribution expenses, as well as custodial,transfer agency, legal, accounting, and other administrativeexpenses). Although these fees and expenses may not belisted individually as specific line items on your accountstatement, they can have a substantial impact on yourinvestment over time.The Impact of Mutual Fund Fees andExpenses on Your Investment PortfolioFees and expenses vary from fund to fund and the amountyou pay may depend on the fund’s investment strategy.A fund with high costs must perform better than alow-cost fund to generate the same returns for you. Evensmall differences in fees from one fund to another can addup to substantial differences in your investment returnsover time, as the graph below shows.Portfolio Value From Investing 100,000 Over 20 Years 220,000 210,000 200,000 190,000 180,000 170,000 160,000In 20 years, 0.50% annual feesreduce portolio value (red line)by 10,000 compared to aportfolio with a 0.25% annualfee (blue line).In 20 years, 1.00% annual feesreduce portfolio value (greenline) by nearly 30,000,compared to a portfolio with a0.25% annual fee (blue line). 150,000 140,000 130,000 120,000 110,000 100,0002013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033Investor Assistance (800) 732-03304% annual return less0.25% annual fee4% annual return less0.50% annual fee4% annual return less1.00% annual feewww.investor.gov
The graph above shows how mutual fund fees and expensescan affect your mutual fund investment portfolio. Thegraph illustrates the effect of fees and expenses in threehypothetical scenarios, as represented by the blue, red,and green lines.nnnThe more you pay in fees and expenses, the less moneyyou will have in your investment portfolio. And thesefees and expenses really add up over time. Given thecompounding effect of fund fees and expenses and theirimpact on your investment returns, you may want to use amutual fund cost calculator to compute how the costsof different mutual funds would add up over time.The blue line represents the investment portfolio ofa hypothetical mutual fund that does not charge shareholder fees and that produced a 4% annual returnover 20 years and had annual operating expenses of0.25% (i.e., 25 for every 10,000 invested) duringthat period. If you invested 100,000 in this fund,then after 20 years your investment portfolio wouldbe worth approximately 208,000.Shareholder Fees and AnnualOperating Expenses GenerallySome funds may cover the costs associated with yourtransactions and your account by imposing fees andcharges directly on you at the time of the transactions (orperiodically with respect to account fees). You can findthese fees and charges listed in a standardized fee tablelocated near the front of a fund’s prospectus, under theheading “Shareholder Fees” (described below).The red line represents the investment portfolio of ahypothetical mutual fund that does not charge shareholder fees and that produced a 4% return over 20years and had annual operating expenses of 0.50%(i.e., 50 for every 10,000 invested) during thatperiod. If you invested 100,000 in this fund, thenafter 20 years your investment portfolio would beworth approximately 198,000. The fees and expenseswould have consumed about 10,000 more of yourinvestment portfolio over that time, compared tothe hypothetical mutual fund with annual operatingexpenses of 0.25%.In addition, funds typically pay their regular and recurringfund-wide operating expenses out of fund assets, instead ofimposing these fees and charges directly on you. Becausethese expenses are paid out of fund assets, you are payingthem indirectly. These expenses are identified in the standardized fee table in the fund’s prospectus under the heading “Annual Fund Operating Expenses” (described below).The green line represents the investment portfolio ofa mutual fund that does not charge shareholder feesand that produced a 4% return over 20 years and hadannual operating expenses of 1.00% (i.e., 100 forevery 10,000 invested) during that period. If youinvested 100,000 in this fund, then after 20 yearsyour investment portfolio would be worth approximately 179,000. The fees and expenses would haveconsumed nearly 30,000 more of your investmentportfolio over that time, compared to the hypothetical mutual fund with annual operating expenses of0.25%.It is important to understand that mutual funds do notimpose these fees and expenses arbitrarily. Rather, thefund’s board of directors is responsible for overseeing thefund’s operations and management. The fund’s directors,and its independent directors, in particular, function as“watchdogs” who are supposed to look out for the interestsof the fund’s shareholders. One of the most significantresponsibilities of a fund’s board of directors is to negotiateand review the advisory contract between the fund andthe investment adviser to the fund, including fees andexpense ratios.Investor Assistance (800) 732-0330www.investor.gov2
deliver a full-length prospectus only. If you are purchasinga mutual fund through a financial professional, ask thatperson to explain all the charges that may apply to yourinvestment in the fund.But even though these fees and expenses may be entirelyappropriate based on the fund’s operations, these costsmay be higher than what you might be willing to pay—sobe sure to comparison shop and decide whether a similarfund with lower expenses would make better sense for you.Remember, the more you pay in fees and expenses, the lessmoney you will have in your investment portfolio.Mutual Fund Fee TableA mutual fund is required to disclose its shareholder feesand operating expenses in the form of a standardized feetable in its prospectus.Before investing in a mutual fund, you should read thefund’s prospectus carefully. Some funds provide a “summary prospectus” that includes information on how youcan obtain a full-length prospectus, while other funds mayIn the fee table, under the heading of “Shareholder Fees,”you will find some or all of the following items:Shareholder Fees[Sales Loads [including Sales Charge (Load) on Purchasesand Deferred Sales Charge (Load)]Similar to a commissionyou pay to a broker.[Imposed when you redeemyour shares in the fund.Redemption FeeExchange FeeAccount Fee[Purchase FeeInvestor Assistance (800) 732-0330[[Imposed when exchanging fundshares for the shares of anotherfund within the same fund group.Imposed if account fallsbelow a particular level.Some funds charge this fee when youpurchase their shares to defray costs tothe fund associated with your purchase.www.investor.gov3
In the fee table, under the heading of “Annual FundOperating Expenses,” you will find some or all of thefollowing items:Annual Fund Operating Expenses[Management Fees[Distribution [and/or Service] (12b-1) Fees[Other Expenses[Total Annual Fund Operating ExpensesPaid out of fund assets to thefund’s investment adviser.Paid out of fund assets tocover distribution expenses.For example, legal andaccounting expenses.Expressed as a percentage ofthe fund’s average net assets.loads to exceed 8.5%. The percentage is lower if a fundimposes other types of charges.Below is a discussion of shareholder fees and annual fundoperating expenses. For a description of other fees andexpenses associated with investing in mutual funds, seeour Investor Bulletin: How Fees and Expenses Affect YourInvestment Portfolio.There are two general types of sales loads—a front-end salesload that you pay when you purchase fund shares and aback-end or deferred sales load that you may pay whenyou redeem your shares. When purchasing fund shares,you may or may not have a choice of whether to pay afront-end sales load, a back-end sales load, or some otherdeferred sales load, depending on the fund.Shareholder FeesIn this section, we discuss those items that you will findunder the heading of “Shareholder Fees” in the fee table.Sales LoadsSales Charge (Load) on PurchasesFunds that use brokers to sell their shares compensate thebrokers. Funds may do this by imposing a fee on investors,known generally as a “sales load” (or “sales charge (load)”),which is paid to the selling brokers. In this respect, a salesload is like a commission you pay when you purchase anytype of security from a broker.The category “Sales Charge (Load) on Purchases” in thefee table includes sales loads that you might pay whenyou purchase fund shares (also known as “front-end salesloads”). Typically, a mutual fund calculates the amountof front-end sales load based on a percentage of the salesprice. The key point to keep in mind about a frontend sales load is that it reduces—right off the top—theamount of money that you have available to purchasefund shares (as described in the example below).While the SEC does not limit the amount of sales loada fund may charge, the Financial Industry RegulatoryAuthority (“FINRA”) does not permit mutual fund salesInvestor Assistance (800) 732-0330www.investor.gov4
Front-End Sales LoadBack-End Sales LoadFor example, if you write a 10,000 check to afund to purchase fund shares, and the fund hasa 5% front-end sales load, the total amount ofthe sales load will be 500. The 500 sales load isdeducted from your 10,000 check (and typicallypaid to a selling broker), and assuming there areno other front-end fees, the remaining 9,500 isused to purchase your fund shares.For example, if you invest 10,000 in a fund witha 5% back-end sales load, and if there are no other“purchase fees,” the entire 10,000 will be used topurchase fund shares, and the 5% sales load is notdeducted until you redeem your shares, at whichpoint the fee is deducted from the redemptionproceeds.Typically, a fund calculates the amount of a backend sales load based on the lesser of the value ofthe shareholder’s initial investment or the valueof the shareholder’s investment at redemption.For example, if you initially invest 10,000, andat redemption the investment has appreciatedto 12,000, a back-end sales load calculated inthis manner would be based on the value of yourinitial investment— 10,000—not on the valueof the investment at redemption. Similarly, ifyou initially invest 10,000, and at redemptionthe investment has declined in value to 8,000,a back-end sales load calculated in this mannerwould be based on the value of the investment atredemption— 8,000—not on the value of yourinitial investment in this example. You shouldread a fund’s prospectus carefully to determinewhether the fund calculates its back-end salesload in this manner.Sometimes, funds offer discounts for larger investmentamounts—usually called “breakpoint discounts”—inwhich the sales load is reduced if more than a certainamount of money is invested.Deferred Sales Charge (Load)The category “Deferred Sales Charge (Load)” in the feetable refers to a sales load that you might pay when youredeem fund shares (that is, sell your shares back to thefund). You may also see this referred to as a “deferred” or“back-end” sales load. When you purchase shares that havea back-end sales load instead of a front-end sales load, nosales load is deducted at the time of your purchase, so allof your money is used immediately to purchase fundshares (assuming that no other fees or charges apply atthe time of purchase).Investor Assistance (800) 732-0330www.investor.gov5
The most common type of back-end sales load is the“contingent deferred sales load,” also referred to as a “CDSC,”or “CDSL.” The amount of this type of load will dependon how long you hold your shares and may graduallydecline to zero if you hold your shares long enough. Forexample, a contingent deferred sales load might be 5%if you hold your shares for less than one year, 4% if youhold your shares for one to two years, and so on until theload goes away completely. The rate at which this fee willdecline will be disclosed in the fund’s prospectus.typically imposes a redemption fee to defray fund costsassociated with a shareholder’s redemption and that fee ispaid directly to the fund, not to a broker. The SEC limitsredemption fees to 2.00%.Exchange FeeAn exchange fee is a fee that some funds may impose onyou if you exchange (transfer) your shares in one fund forshares of another fund within the same fund group.Account FeeA fund or class with a contingent deferred sales load typically will also have an annual 12b-1 fee (described below).An account fee is a separate fee that some funds mayimpose on you in connection with the maintenance ofyour accounts. For example, some funds impose anaccount maintenance fee on accounts valued at less thana certain dollar amount (for example, on accounts valuedat less than 10,000).No-Load FundsSome funds identify themselves as “no-load”funds. As the name implies, a no-load fund doesnot charge any type of sales load. But no-loaddoes not mean no fees. As described above, notevery type of shareholder fee is a “sales load,” anda no-load fund may charge fees that are not salesloads. For example, a no-load fund is permitted tocharge purchase fees, redemption fees, exchangefees, and account fees, none of which is considered to be a “sales load.” It is important to knowexactly what fees and charges you will be paying,even for no-load funds.Purchase FeeA purchase fee is a type of fee that some funds may chargewhen you purchase their shares. A purchase fee differsfrom, and is not considered to be, a front-end sales loadbecause a purchase fee is paid to the fund (not to a broker)and is typically imposed to defray some of the fund’s costsassociated with the purchase.Annual Fund Operating ExpensesIn this section, we discuss those items that you will findunder the heading of “Annual Fund Operating Expenses”in the fee table.Redemption FeeManagement FeesA redemption fee is another type of fee that some fundsmay charge you when you redeem your shares. Typically,a fund expresses the redemption fee as a percentage of theredemption price. Although a fund may deduct a redemption fee from redemption proceeds just like a deferred salesload, a redemption fee is not considered to be a sales load.Unlike a sales load, which is used to pay brokers, a fundManagement fees are fees that are paid out of fund assetsto the fund’s investment adviser (or its affiliates) for managing the fund’s investment portfolio, and administrative feespayable to the investment adviser that are not included inthe “Other Expenses” category (discussed below).Investor Assistance (800) 732-0330www.investor.gov6
tion about their investments. A fund may pay shareholderservice fees without adopting a 12b-1 plan. If shareholderservice fees are part of a fund’s 12b-1 plan, these fees willbe included in the “Shareholder Fees” category of the feetable. If shareholder service fees are paid outside a 12b-1plan, then they will be included in the “Other Expenses”category, discussed below. FINRA imposes an annual0.25% cap on shareholder service fees (regardless ofwhether these fees are authorized as part of a 12b-1 plan).Distribution [and/or Service] (12b-1) Feesand 12b-1 PlansThis category identifies so-called “12b-1 fees,” which arefees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.These “12b-1 fees” get their name from the SEC rule thatauthorizes a fund to pay them. The rule permits a fund topay distribution fees out of fund assets only if the fund hasadopted a plan (12b-1 plan) authorizing their payment.Other Expenses“Distribution fees” include fees paid for marketing andselling fund shares, such as compensating brokers andothers who sell fund shares, and paying for advertising, theprinting and mailing of prospectuses to new investors, andthe printing and mailing of sales literature. The SEC doesnot limit the amount of 12b-1 fees that funds may pay.Under FINRA rules, however, 12b-1 fees that are used topay marketing and distribution expenses (as opposed toshareholder service expenses) cannot exceed 0.75% of afund’s average net assets per year.Included in this category are expenses not included in thecategories “Management Fees” or “Distribution [and/orService] (12b-1) Fees.” Examples include: certain shareholder service expenses; custodial expenses; legal expenses;accounting expenses; transfer agent expenses; and otheradministrative expenses.Total Annual Fund Operating Expenses(or “Fund’s Expense Ratio”)This line of the fee table represents the total of a fund’sannual fund operating expenses, expressed as a percentageof the fund’s average net assets.Some 12b-1 plans also authorize and include “shareholderservice fees,” which are fees paid to persons to respondto investor inquiries and provide investors with informa-Investor Assistance (800) 732-0330www.investor.gov7
Related InformationSEC Investor Bulletin: How Fees and ExpensesAffect Your Investment PortfolioSEC Publication: Mutual Funds—A Guide forInvestorsSEC Publication: Invest Wisely: An Introductionto Mutual FundsThe Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If youhave questions concerning the meaning orapplication of a particular law or rule, pleaseconsult with an attorney who specializes insecurities law.SEC Investor Bulletin: How to Read a MutualFund Shareholder ReportSEC Pub. No. 162 (5/14)
a mutual fund through a financial professional, ask that person to explain all the charges that may apply to your investment in the fund. Mutual Fund Fee Table. A mutual fund is required to disclose its shareholder fees and operating expenses in the form of a standardized fee . table in its prospectus. In the fee table, under the heading of “File Size: 446KB
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