• Michael Kostelnik

What Does A Mutual Fund Cost?

If you read my recent post about mutual funds being a great place to start investing, you will know I think they are an excellent place for you to start. You may be wondering what does it cost, and how does the mutual fund company get paid. I'm going to answer that for you today.


Home Much Money Do I need to start?


When some people say, "How much does a mutual fund cost," they are asking how much they need to start investing. Yes, many companies have very high minimum investments, but there are also many companies with very affordable minimums. Many mutual fund companies will have a minimum required investment of $25 a month with no minimum account value. While it may be hard to find advisors that will do this, they do exist. As your parents who they work with or ask a friend.


Also, I have no minimum account balance (cheap plug), so please feel free to call me.


For other people, the question of cost has to do with knowing what fees you will pay. Here are the majority of the expenses you will see:


Share Class


Mutual funds come in different share classes. The investment portfolio is the same, but the fee structure is different. Each share class is identified with a let. For example, A-shares and I-shares will have the same investments but charge different fees.


A breakdown of share classes will be at the end of this post.


Load/Sales Charge


A load, also called a sales charge, is a fee you pay with each contribution you make. Often it goes to pay your brokers commission. For smaller accounts, these fees are usually around 5%. If you are contributing $25 per month, you will pay a sales charge of $1.25 on that contribution each month.


As your account grows, your sales charge will decrease from 5%. Each company has its own schedule, but most do not start lowering the sales charge until you reach $50,000 in your account. It is essential to know; not all funds charge sales charges.


Expense Ratio


The expense ratio is to cover the day to day operations of the mutual fund. Similar to sales charges, expense ratios are a percentage. Unlike sales charges, the expense ration is charged on the entire account balance. Also, unline expense ratios, there is no discount for having large account balances.


12b1 fees


Much like sales charges, 12b1 fees pay your broker. This fee is included in the expense ration and charged on the entire account balance. This fee is to encourage your broker to service your account continually.


CDSC


Contingent Differed Sales Charges, or CDSC, are essentially a surrender penalty. It is a fee charged for not owning an investment long enough. Often, it is to recoup the commission paid to the broker when a sales charge is not collected.


Account fees


Just like your bank, many investment companies charge account fees. It is usually a flat dollar amount for each account you have open. Since the amount is not a percentage of your account, pay attention to the account fee. Account fees are not affected by share class.


When starting investing, unfairly high account fees can destroy your investment account.


What Are the Common Share Classes (and a few other descriptors)


Most companies have similar share classes, but there are some strange ones out there. Here are the most common, along with a very general classification of their fees.


A-Shares


A-Shares have a high sales charge, average expense ratios, and 12b1 fees. A-shares do not have CDSC's. A-shares are designed to own for five years or longer.


B-Shares


B-shares are generally extinct. They had higher CDSC's and high expense ratios but no sales charge.


C-Shares


C-shares are similar to B-shares but have lower CDSC's and expense ratios. They are designed to own for less than five years.


I-Shares


Usually standing for Institutional, I-shares have high minimum investments, no sales charge or CDSC, and low expense ratios. It is good to have money.


No-Load


The phrase No-load is not a technical share class but is used to describe any mutual fund without an upfront sales charge. Often they are marketed as lower-cost funds and won't have a CDSC. The expense ratios can vary widely. Vanguards are very low, but actively managed funds can be expensive.


Active Funds


Active funds actively change the investments in their portfolio. The belief is they can pick winning stocks and avoid losing stocks well enough to offset the higher fees.


Index Funds (Passive)


Index fund do not actively trade. Instead, they mirror a broad index like the S&P 500. They update the investments monthly to make sure they are in the right balance. Since they trade less frequently, the costs are often much lower than active funds.


I know there are a lot of options. If you need help, ask me, but also start. No action is worst than any other activity. Please begin investing today.

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For informational purposes only.  Please consult a professional before deciding if concepts in this post are right for you.

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