Charges in mutual funds and their effect on the investor's return

Abstract

Scope of Study: Provide a consumer guide concerning associated costs and how they can affect the investor's return. Objectives were to: outline advantages and disadvantages of mutual funds; define difference between load and no-load mutual funds; describe other associated costs and how they affect the return; examine SEC disclosure proposals; and provide a consumer card with recommendations on what to be aware of. The study investigated the costs through professional and business publications and selected a sample size of no-load and load mutual funds.

Findings and Conclusions: The investor needs to be aware of associated charges because they can dramatically affect the investor's return. The following associated charges can be in mutual funds: loads, redemption fee, exit fee, back-end load, deferred sales charge, reloading charge, 12b-1 fee and distribution fee. Each fee can reduce the return to the investor. The additional charges are: transaction costs, operating expenses and portfolio management fees. These are relatively low and do not impact the return, however abnormal fees can be a sign of poor management or impending failure. The SEC has made it a requirement for funds to publish a charge/fee disclosure table in each prospectus reflecting how the return is affected.