Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares.
Although they may seem negligible, fees and expenses can substantially reduce an investor's earnings when the investment is held for a long period of time.
For the reasons cited above, it is important for a prospective investor to compare the fees of the various funds under consideration.
To facilitate the comparison of funds, it is helpful to compare the total expense ratio.
The following table shows the weighted average total expense ratios for different types of mutual funds organized in the United States as of December 31, 2020, as published by Morningstar, Inc.[1] Purchase Fee—A type of fee that some funds charge their shareholders when they buy shares.
[2] Redemption Fee—another type of fee that some funds charge their shareholders when they sell or redeem shares.
"Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.
Funds with a high turnover ratio, or investing in illiquid or exotic markets usually face higher transaction costs.
Also known as a "front-end load", this fee typically goes to the brokers that sell the fund's shares.
Back-end loads start with a fee of about 5 to 6 percent, which incrementally discounts for each year that the investors own the fund’s shares.
[2] It's similar to a back-end load in that no sales charges are paid when buying the fund.
The investment levels required to obtain a reduced sales load are commonly referred to as "breakpoints".
In addition, a Financial Industry Regulatory Authority (FINRA) member brokerage firm should not sell you shares of a fund in an amount that is "just below" the fund's sales load breakpoint simply to earn a higher commission.
Each fund company establishes its own formula for how it will calculate whether an investor is entitled to receive a breakpoint.
For that reason, it is important to seek out breakpoint information from your financial advisor or the fund itself.
It is very hard for a fund to significantly lower its expense ratio once it has had a few years of operational history.
Thus, if an investor buys a fund with a high expense ratio that has some history, he/she should not expect any significant reduction.
This article incorporates public domain material from Invest Wisely: An Introduction to Mutual Funds.