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Mutual Fund Fees

Mutual funds have a number of fees associated with them. No all funds charge all fees. Here's a brief overview of what you might encounter:

Marketing Fees: Marketing fees include loads and 12(B)-1 Fees. The SEC has established maximum for these fees, limiting marketing fees to 7.25% of the fund's value.

Loads: Loads are a type of sales charge or redemption charge on the fund.

Up-Front Load: An up-front load is a charge to pay sales commission. It's a percentage of the total investment and is subtracted from your investment when you buy shares in the fund. In some cases it may be on a sliding scale. You pay less load if you invest more money. An up-front load will pay off if you invest in a fund with a high return.

Back-End Load: A fee you pay when you sell fund shares is known as a back-end load. It's sometimes also called a redemption or exit fee. It's calculated as a percentage of the value of your shares at the time of redemption and subtracted from the money paid to you. Back end loads are sometimes set up so the load decreases the longer you've held your shares.

No Load: There is no additional charge to buy this fund. Usually these funds are offered by discount brokers who do not give any investment advice.
12(B)-1Fees: 12(B)-1 Fees are additional marketing fees permitted by the SEC. They can be up to 1% per year. Not all funds charge this fee.

Annual Fee: The Annual Fee is the fee fund managers charge for administering the fund. It's quoted as a percentage of fund's total value and ranges from .25% to 2%. The average fund charges 1.5%. Almost every fund has an annual fee.


How You Make Money

Mutual funds are required to pay 98% of their earnings annually to shareholders. You can choose to have your money automatically reinvested, you can have a check sent to you, or you can have it deposited into an account. With mutual funds, you make money from three sources: Dividends, Capital Gains, and Increasing Share Values.

Where The Profits Come From

Dividends

Stock Funds: When a company in which the fund has shares issues dividends, you receive a proportionate amount based on the amount of your investment. You can decide whether to reinvest your dividends in additional mutual fund shares or be paid outright.

Bond Funds: All bonds pay interest. When a bond which the fund owns pays interest, you receive a proportionate amount of this interest. It is paid to you as fund dividends- either in cash or reinvested in your account.

Capital Gains

Stock Funds: When the value of a stock in which your fund has invested increases, you receive the profits from the sale of that stock (when it is sold) as capital gains. The fund balances these gains against capital losses and pays you a capital gains distribution.

Bond Funds: Few bonds have capital gains associated with them, so income from this source is limited with a bond fund.

Increasing Share Value

Stock Funds: As the value of the assets it holds increases, the value of the fund itself increases. If it's a closed end fund, the value can increase significantly. You receive a proportionate amount of the increase when you sell your shares in the fund.

Bond Funds As the value of the assets it holds increases, the value of the fund itself increases. If it's a closed end fund, the value can increase significantly. You receive a proportionate amount of the increase when you sell your shares in the fund.


Remember, mutual funds are only as good as stocks and bonds they own. When selecting a fund, do your homework. Pick one that meets your goals and that has a strong track record.



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