Basics on Mutual Fund Fees, Loads, and Expenses

Before You Buy Mutual Funds, Know the Costs and Keep Them to a Minimum

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No matter what you read or hear, there are no mutual funds that are free of fees or expenses. Some costs are transparent while others are not so easy to see or understand.

Before you buy mutual funds, make sure you know the costs. Here is a primer on all the fees and expenses you might pay (or will hopefully avoid) when buying mutual funds.

Key Takeaways

  • Mutual fund loads are fees for buying or selling a mutual fund, but they should be avoided by seeking out no-load funds instead.
  • Depending on your broker, you may also pay a transaction fee for buying or selling mutual fund shares.
  • Expense fees can't be avoided because it's how fund managers get paid, but you can seek out mutual funds with lower-than-average expense fees.

Mutual Fund Loads

Loads are fees charged to the investor when buying or selling certain types of mutual funds. The purpose of loads is to pay a broker or advisor for their services. Therefore, unless you are working with a broker or advisor, you should not pay loads of any kind.

There are three basic types of loads:

Front-End Loads

These are charged up front (at the time of purchase) and average around 5% but can be as high as 8.5%. For example, if you invest $1,000 with a 5% front load, the load amount will be $50.00, and therefore your initial investment will be $950. Mutual funds with front loads will usually be Share Class A funds, which are normally identified by the letter 'A' at the end of the fund name.

Back-End Loads

Also called contingent deferred sales charges, back loads are charged only when you sell the fund. These charges can also be 5% or more, but the load percentage is usually reduced in increments over several years until the load amount reaches zero. Mutual funds with back loads will usually be Share Class B funds, which are normally identified by the letter 'B' at the end of the fund name.

Level Loads

These loads are neither charged at purchase, nor at the sale of the mutual fund. Instead, there is an ongoing "level" percentage, such as 1.00%, that the investor pays to the mutual fund company. Like front-end loads and back-end loads, level loads are not fees paid directly out of the investor's pocket, nor are they "billed" to the investor. Instead, with level loads, the fee reduces the net return of the investor.

For example, if a level load fund charging 1.00% has a total return before fees of 10%, the investor will get a net return of 9%. Mutual funds with level loads will usually be Share Class C funds, which are normally identified by the letter 'C' at the end of the fund name.


If you must use load funds, the cheapest for a long-term investor, hopefully with a holding period of 10 years or more, will be front-load funds or A shares. The most expensive for long-term investors, but generally the best for short-term holding periods, is the C share class.

Also called trailing commissions or sometimes referred to as "hidden fees," 12b-1 fees are charged by some mutual funds and used to pay marketing, distribution, and service costs. The fees are paid to the broker and can be as high as 1.00% annually. Class B and C share mutual funds generally charge the maximum 1.00% 12b-1 fee, while A-share funds and no-load funds typically do not charge a 12b-1 fee.

Again, if you are not using a broker or advisor, you should be using no-load funds.

Mutual Fund Transaction Fees

Transaction fees are trading expenses charged to the investor when buying or selling shares of stocks, mutual funds or Exchange Traded Funds (ETFs). These fees can be as low as $7 at some discount brokers, such as Scottrade or Charles Schwab, but they can be much higher, depending upon the investment and/or the broker.

These fees are one-time charges, but they occur every time the investor buys shares. Many investors wisely buy shares of their stocks, mutual funds or ETFs on a periodic basis, such as monthly.

But if fees are charged for each transaction, the costs add up over time. For example, a $10 transaction fee per trade would add up to $120 per year for monthly purchases. If the investor is buying $100 of shares per month, the $10 transaction fee reduces the investment to $90, which is a 10% expense. It is no different than a 10% "loss" in value due to market fluctuations.


Trading costs and other expenses are a drag on overall performance, so a no-load mutual fund family, such as Vanguard, Fidelity, or T. Rowe Price, is a wise choice for low-cost investing; by investing directly with the fund family, transaction fees are often waived.

Look for "no transaction fee" funds (or NTF) before buying. If you like a particular fund but the broker or fund company charges a transaction fee to buy shares, try buying larger amounts, with less frequency, if this strategy makes sense for your savings goals and investment objectives.

Mutual Fund Expense Ratios

Expense ratios are percentages that express the amount of fees paid to the mutual fund company to manage and operate the fund, including all administrative expenses and 12b-1 fees. Like many other fees and expenses related to mutual funds, the expense ratio does not represent a charge that is directly payable by the investor. Instead, the expenses are taken from the mutual fund assets. The investor receives the net return. For example, if a fund with a 1.00% expense ratio has an annual gross return of 10.00% before expenses, the investor will have earned a net return of 9.00% after expenses.

There are plenty of good mutual funds with below-average expense ratios to choose from in the universe. Therefore don't settle for expensive when you can have inexpensive and high quality. Here is a breakdown and comparison of average expense ratios you can expect, based on fund category:

  • Large-Cap Stock Funds: 1.25%
  • Mid-Cap Stock Funds: 1.35%
  • Small-Cap Stock Funds: 1.40%
  • Foreign Stock Funds: 1.50%
  • S&P 500 Index Funds: 0.15%
  • Bond Funds: 0.90%

Never buy a mutual fund with expense ratios higher than these. The expense ratios are typically higher for actively managed funds because of the research and analysis needed to maintain an active ("beat the market") strategy. But ironically, the majority of actively-managed funds do not outperform the benchmark indexes over long periods of time, especially for more than 10 to 15 years and beyond.

For this reason, look for no-load funds and index funds for low expenses and benchmark-matching returns over time.

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  1. “Sales Charge (or Load).”

  2. “Mutual Fund Classes.”

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