5 Mutual Fund Fees to Ask About Before You Invest

Higher fees don't necessarily equate to better performance

Consultant or advisor with calculator on table talking to a couple.
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All mutual funds have fees, some more than others. Below are five different types of fees to ask about before you invest.

Key Takeaways

  • Mutual fund fees vary in cost and purpose, and they can affect your bottom line.
  • All mutual funds have an expense ratio, which is a percentage of the total assets and is used to compensate fund managers.
  • Other fees include commissions (or sales charges), trading fees, redemption fees, and service fees.

1. The Expense Ratio: This Ongoing Fee Is in Every Mutual Fund

It costs money to run a mutual fund. Some funds cost more to operate than others. Regardless of the cost, all mutual funds have a fee referred to as an expense ratio, or sometimes called a management fee or an operating expense. This fee is deducted from the total assets of the fund before your share price is determined.

Example: Suppose you own a mutual fund that is valued at $10 per share. It has a gross return of 10%, meaning that its total investment return was $1 per share. If there were no fees, the fund share would be valued at $11, but the fund manager deducts 1% in fees, so your actual investment return is 89 cents instead of the full $1, and after fees, your share is worth $10.89.

General rules about expense ratios:

  • Actively managed funds have higher operating expenses than passive funds or index funds. This is because an actively managed fund is conducting ongoing research trying to determine the best securities to own. This research costs more, but statistics show that you don’t necessarily get what you pay for.
  • International funds have higher fees than domestic funds. It costs more to purchase investments that are traded outside of the U.S. This higher cost is passed along in the form of higher expense ratios.
  • Small-cap funds may have higher fees than large-cap funds. It costs more to buy and sell small-cap funds than large ones. This higher cost is passed along in the form of higher expense ratios.
  • Index funds or passively managed funds typically have the lowest fees, and finding these types of funds has been proven to be a strong indicator of good future fund performance.
  • Different companies may charge widely varying expense ratios for similar funds. A large-cap equity growth fund at Company A may charge much more than the same type of fund at Company B.

When comparing fund fees, keep the items above in mind. It doesn't make sense to compare the fund fee on a U.S. large-cap fund to one on an international fund. That is not an apples-to-apples comparison.

2. Sales Charge or Commission: An Upfront Fee You Pay

When you buy an “A share” mutual fund, you will pay a commission when you purchase the shares. This type of fee is sometimes referred to as a sales charge or a "front-end load." Thus a "no-load" fund has no such upfront fee.

With a front-end load fund, if your total investment amount exceeds a threshold amount and you are willing to invest it all into the same fund family, you may qualify for what is called a "breakpoint," or a lower upfront fee. 

Here's an example of a front-end load: Let’s say you are buying a fund that is valued at $10 per share and has a 5% front-end sales charge or load. You will pay approximately $10.52 for each share purchased, as a 5% sales fee will be added on to the final purchase price of your shares.

Many financial salespeople are paid by these types of loads or commissions. 

3. Redemption Fees: A Fee You Pay When You Sell Shares

When you buy a “B share” mutual fund, if you sell shares of your fund within a specified time frame you will pay a redemption fee, also referred to as a "back-end load," a contingent deferred sales charge, or a surrender charge.

Example: Suppose you are buying a fund that is valued at $10 per share and has a 5% contingent deferred sales charge. If you sell your shares within one year of purchase, you would receive $9.50 per share. Usually, this fee goes down each year, so in year two, it may drop to a 4% fee, in year three, 3%.

If you own your B share funds for the required amount of time, according to that fund’s schedule, then you will not incur a surrender charge when you sell them.

4. Short-Term Trading Fees

Mutual funds are designed to be long-term investments; short-term trading fees have been imposed on some funds to discourage investors from trading in and out of funds. Mutual funds inside your 401(k) account may be subject to short-term trading fees.

For example, short-term trading fees are imposed when you purchase shares and then sell them again within 30 to 90 days. In this scenario, the mutual fund may charge you a fee of 1% to 3% upon the sale of the recently purchased shares.

5. 12(b)1 Fee, Service Fee, or Distribution Fee

Many funds have an ongoing service or marketing fee, also called a 12(b)1 fee, which is paid to a financial advisor or financial services company as compensation for marketing the fund.

If you purchase a “C share” mutual fund it will typically have an extra 1% 12(b)1 fee, in addition to an expense ratio. Just like the expense ratio, this service fee will be deducted out of the total fund assets before your share price is determined.

Example: Let’s say you own a C share that is valued at $10 per share. It has a gross return for the year of 10%, meaning its total investment return was $1 per share. The fund manager deducts 1% in fees, so your actual investment return is 89 cents instead of the full $1.

Times Are Changing

In recent years, investors have become more sensitive to the fees they're paying to invest. Mutual fund companies are feeling the pressure to reduce their fees to better compete with ETFs, roboadvisors, and other lower-cost options.

Mutual fund fees have dropped substantially, but don't let your guard down. High fees can rob you of a substantial amount of portfolio growth over time, and studies show that higher fees do not equate to better performance.

Frequently Asked Questions (FAQs)

How do you calculate the impact of mutual fund fees?

If your fees are quoted as a percentage, you can multiply that percentage by your total investment to learn the exact amount of your annual fees. For example, if you invest $500 into a mutual fund that charges a 1% annual expense fee, then your total fee amount for the year is $5 ($500 x 0.01).

When are mutual fund fees charged?

Fund expense fees are typically extracted directly from the fund's holdings, which means you'll never see a "charge" on your mutual fund shares in your brokerage account. Instead, the fees are more likely to be subtracted from distributions like dividends and capital gains. For example, if you are due $5 in dividends, but you owe $1 in expense fees, then you will receive $4 instead of $5. Sales commissions, redemption fees, and other types of fees may be imposed during transactions or at other times.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. FINRA. "Mutual Funds: Active vs. Passive Management."

  2. Investor.gov. "International Investing."

  3. Investor.gov. "Updated Investor Bulletin: Mutual Fund Classes."

  4. U.S. Securities & Exchange Commission. "Deferred Sales Charge."

  5. FINRA. "Mutual Funds: Fees & Expenses."

  6. Investor.gov. "12b-1 Fees."

  7. Morningstar. "12b-1 Current."

  8. Center for Retirement Research at Boston College. "How Do Fees Affect Plans’ Ability to Beat Their Benchmarks?" Page 5.

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