A mutual fund can charge you in two ways. Fees you pay directly when you buy or sell, and fees taken out of the fund every year. Most people know about neither, because neither arrives as a bill.
The SEC’s bulletin on mutual fund and ETF fees explains each one. Here is the short version.
Loads: the fee to get in or out
A load is a sales charge. It mostly goes to pay the broker who sold you the fund.
A front-end load comes off the top when you buy. The SEC’s example: you invest $10,000 in a fund with a 5% front-end load. $500 goes to the sales charge. Only $9,500 is actually invested.
You start $500 behind, and that $500 never gets to grow.
A back-end load is charged when you sell. It usually shrinks the longer you hold the fund and can reach zero after enough years. It is the fund version of a surrender charge.
A no-load fund has neither. It can still have yearly expenses, so “no-load” does not mean “no cost.”
12b-1 fees: the yearly one
The name comes from an SEC rule number. A 12b-1 fee is taken out of the fund’s assets every year to pay for marketing the fund and for paying the people who sell it.
Read that again. It is an ongoing fee, paid by you, that pays for selling the fund to others and for the broker’s continuing compensation.
It is included in the fund’s expense ratio, so you will not see it as a separate charge. You see it only as a slightly lower return, every year you hold the fund.
The letter after the name
Many funds come in several “share classes,” shown as a letter. They hold the same investments. They differ in how you pay. FINRA’s mutual funds page describes each class.
Class A usually has a front-end load and lower yearly costs.
Class C usually has no front load, but a higher yearly cost, often for as long as you own it.
Other classes exist for retirement plans and for accounts where an advisor charges a separate fee. These often have no load and no 12b-1 fee.
Same fund, different price. The class you were sold depends a great deal on how the person selling it gets paid.
Same fund, same holdings, different price. The letter tells you who got paid.
How to find what you paid
Every fund has a fee table near the front of its prospectus. It lists sales charges first, then yearly expenses, including any 12b-1 fee. Search the fund’s name and “prospectus,” and look for the table titled “Fees and Expenses.”
Your trade confirmation from the purchase will also show any sales charge.
Three questions before you buy
Is there a version of this fund with no load? Often there is.
How are you paid if I buy this, in dollars? A direct question that deserves a direct answer.
Is there an index fund that covers the same part of the market, and what does it cost? Then compare.
If you already own one
Do not sell in a hurry. A front load is already paid, and selling does not bring it back. A back-end load may still apply, and in a taxable account selling can trigger a tax bill. Look at the yearly cost going forward and decide from there. That is The No-Memory Test: would you buy this today, at this price, knowing what you know now?
Related questions: what a good expense ratio is, what a wrap fee covers, variable annuity fees, added up and how to check if your advisor is a fiduciary.
One question for this week: what letter follows the name of your largest mutual fund? Look it up and see what it means for that fund.
As always, if you want to talk any of this through, the door is open. Genti