What are the fees in a mutual fund?

Among the fees you will pay in a mutual fund are the expense ratio, account fees, maintenance fees, redemption fees, exchange fees and purchase fees.

Is a 1% management fee high?

Mutual fund management fees typically range from as low as 0.1% to more than 2%, so a 1% fee is probably right around the middle of the pack. Keep in mind that management fees differ depending on the fund. Some charge a flat fee, while others charge tiered fees or fees based on asset class and investment balance.

How can I avoid mutual fund fees?

It's difficult to avoid mutual funds altogether because the funds themselves must cover their own operating costs. However, if you have a large sum of money to invest -- usually $1 million or more -- you might be able to avoid many of the typical fees.

Is there a fee for taking money out of a mutual fund?

You might face short-term redemption fees if you sell shares within a specified number of days after purchase or exchange fees for moving your money to another fund.

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Mutual Fund Fees and Expenses: A Beginners’ Guide

May 13, 2024

8 min Read

Written by John Csiszar

Edited by Elizabeth Constantineau

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A mutual fund is a pooled collection of investment funds. When you buy shares in a mutual fund, your money is combined with other investors’ money. A professional fund manager uses the capital to purchase stocks, bonds and other assets on behalf of investors with the aim of maximizing returns. Because managers must be paid, and fund companies must cover their expenses and turn a profit, all mutual funds have fees — even those touted as “low-cost” or “no-load.”

Some fees are more obvious than others, so you might have to look under the hood to see the total cost of your mutual fund investment.

Here’s a quick look at what you’ll find in this guide to mutual fund fees, also known as “loads:”

Upfront Sales Charges for Mutual Funds

Some mutual fund companies offer different share classes for the same mutual funds. Shares that carry an upfront sales charge are typically referred to as A-shares. The Financial Industry Regulatory Authority caps upfront mutual fund sales charges at 8.5%. However, funds rarely charge that much.

In fact, over time, the standard upfront sales charge for a mutual fund has dropped from a high of 8.5% in the 1990s to about 3% to 6% today. Many funds charge no load at all, and those that do typically offer so-called “breakpoints.”

Breakpoints are better known as discounts for larger purchases. For example, a fund might charge you 5.75% upfront for purchases of $25,000 or less, 3.50% for purchases between $100,000 and $250,000, and nothing at all for investments of at least $1 million.

An upfront sales charge reduces the amount that you get to invest. For example, if you’re investing $10,000 into an A-share mutual fund, only $9,900 or less might actually get put to work for you. The excess $100 goes right into the pocket of your financial advisor or the mutual fund company.

Contingent Deferred Sales Charges for Mutual Funds

The term “contingent deferred sales charge” or CDSC is a fancy way of saying you’ll pay a fee if you sell shares of your mutual fund. You typically won’t pay a CDSC if you sell Class A shares of a mutual fund, but you might if you sell Class B or Class C shares. Class B shares typically charge a sales fee that declines the longer you hold the fund.

For example, if you sell B shares in the first year after you bought them, you might face a 5% sales charge. In the second year, the charge might decline to 4%, followed by 3% in year three, 2% in year four and 1% in year five. After a certain number of years, such as eight, B shares automatically convert to A shares, which charge lower ongoing expenses.

Class B shares put all of your money to work right away; however, they do reduce your investment flexibility. Although most mutual fund companies allow you to make free exchanges to other funds within the same family, you can’t sell your MFS fund and buy a Vanguard fund, for example, without triggering the redemption fee.

With C shares, you don’t pay an upfront sales charge, and your CDSC is typically low, such as 1%. C shares usually only charge a CDSC on redemptions made in the first year after purchase. But they never convert to A shares, and they carry higher ongoing expenses.

A C-share investment is something of a hybrid compromise. You don’t lose any money at the time of investment. Plus, after a relatively short time frame, you have the flexibility to change your investment as well. If you hold the shares for a long time, however, you’ll end up paying a higher overall expense.

Mutual Fund Expense Ratios

A mutual fund expense ratio is the percentage of your fund investment that a fund company deducts annually to cover various expenses. Services covered by the expense ratio typically include the following:

Portfolio management
Fund administration and compliance
Shareholder services
Recordkeeping
Distribution charges, known as 12b-1 fees
Other operating costs

Fund expense ratios vary based on a number of factors, ranging from the number of assets in the fund to the fund’s investment objective. On average, larger funds charge smaller expense ratios, and equity funds have higher fees than bonds or money market funds.

How Are Mutual Fund Fees Calculated?

Mutual fund fees are computed by multiplying the sales charge by your invested assets. For sales charges, the computation is (sales charge percentage x assets invested). For example, if you invest $10,000 into an A-share mutual fund charging a 5% fee, you’ll pay (0.05 x $10,000), or $500. This charge goes directly to the mutual fund company.

For annual expenses, the formula is (expense ratio x invested capital). Thus, a fund with a 1% expense ratio will charge $1 for every $100 you have invested in the fund. This money is taken out of your invested funds automatically on an ongoing basis.

What Is the Average Fee for Mutual Funds?

Expense ratios for most funds have come down considerably over the past quarter-century or so amid a rise in investor interest in lower-cost funds. Although it’s not easy finding industry averages, the Investment Company Institute did issue a report in 2023 that tracked trends in mutual fund expense ratios. Here are some of its findings:

In 2022, the average expense ratio for equity mutual funds fell 3 basis points from the previous year to 0.44%.
In 2022, the average expense ratio for bond mutual funds fell 2 basis points from a year earlier to 0.37%.
The average expense ratio for equity mutual funds declined 58% from 1996 to 2022.
The average bond mutual fund expense ratio decreased 56% over the same period.

Other Mutual Fund Fees

Expense ratios don’t cover the commission and trading costs that a fund incurs when buying or selling securities. Those costs are subtracted from a mutual fund’s annual return. A fund that engages in excessive trading, as measured by its turnover rate, may have higher costs that aren’t found in the expense ratio.

Other mutual fund fees might include:

Account fees for establishing an account
Maintenance fees, if your account value falls below a certain level
Short-term redemption fees, if you sell shares within a specified number of days after purchase
Exchange fees, for moving your money to another fund
Purchase fees, or costs on top of sales charges for buying a fund

Are Mutual Funds Safe?

All investments bear some risk. As mutual funds come in many styles, some are riskier than others in terms of volatility. However, other, less-obvious risks affect different types of funds as well. Bond funds, for example, carry interest rate risk and inflation risk, among others, whereas international funds carry foreign currency risk.

Overall, mutual funds can help reduce risk in a portfolio because they traditionally invest in diversified portfolios. However, each fund still carries risk, and these risks should be outlined in the fund’s prospectus.

How Do I Choose a Mutual Fund?

To choose a mutual fund, you must incorporate a number of different factors. Certainly, cost should be one of the most important considerations; however, your investment objectives and risk tolerance are equally important.

All other things being equal, you’ll want to choose the fund with the lowest combination of upfront and ongoing expenses. However, if you’re looking for a high-risk, high-growth fund, it makes no sense to buy a low-cost government bond fund. First, match your investment style with a fund. Then, look to make the lowest-cost choice.

When it comes to looking at costs and fees, the best place to look is at the mutual fund’s prospectus. This is where you will find information about the fund’s expense ratio. The best way to see if a mutual fund has competitive costs is to compare them to the ICI’s benchmark expense ratios mentioned earlier: 0.44% for equity mutual funds and 0.37% for bond mutual funds.

Here are some other steps to take when choosing a mutual fund, according to Experian:

Set your investment goals. This might include whether you are looking at long-term or short-term investments, and how much profit you want to make.
Consider active vs. passive funds. An actively managed fund is one in which a portfolio manager oversees the asset selection and rebalancing. A passive fund typically traces on index, such as the S&P 500.
Review the types of funds you want to invest in. These typically include equity funds that invest in stocks, bond funds, money market funds, index funds, target-date funds and balanced funds.
Find the fund that works best for you: Once you have settled on a specific type of mutual fund you want to invest in, you can now choose individual funds that align with your financial goals.
Review the fund’s prospectus: In addition to helping you learn about fees, the prospectus provides valuable info on its performance, risks, goals and strategy.

Mutual Funds Have Ongoing Costs

When you purchase a stock, you usually pay a commission to buy and sell and incur no additional costs.

In addition to fees to purchase and sell shares, mutual funds also have ongoing costs to investors. You might have to read the fund prospectus to find a complete list of costs, as they are not all immediately apparent. Although fees generally have fallen across the board, when it comes to investing in mutual funds, there’s no such thing as a free lunch.

Vance Cariaga and Daria Uhlig contributed to the reporting for this article.