Copyleft 2006. Michael Saville
Most people talk about loads when they talk about fees that mutual funds charge. When a mutual fund has a "load," it just means that it charges a sales commission to buy, sell, or do both. There are funds that charge a lot of money and funds that don't charge a lot of money (known as "load funds" and "no load funds" respectively).
Front-end loads are sales commissions that you pay when you buy something. So, if you invest $10,000 in a fund that has a front-end load of 5%, the fund will take 5% of your investment, or $500, and put it in its own pocket right away. Only what is left over after the load is taken out will be put into the fund. In this case, only $9,500 of your initial $10,000 investment will go into the fund.
When you sell (or "redeem") your shares, back-end loads take their sales commissions. So, when you go to cash in your shares in a fund with a back-end load, you will get the value of your shares less the sales commission.
Management fees are what mutual funds use to pay for the services used to run the fund. In other words, the managers and analysts of the fund are paid with these fees. Management fees are usually less than 1% of the fund's assets, and they are much lower for passively managed funds like index funds than for actively managed funds. You should remember that a high management fee does not mean that the management team will be better.
If you invest or plan to invest a certain amount of money, you can lower your front loads. "Break-points" are the plans for reducing the load. For example, most fund companies will give you a 1% discount on the front load if you invest over $100,000 or plan to do so in the next 13 months. The load will get lighter the more you put into it. Some fund companies' break-points start at $50,000 over 13 months, and with many funds, there is no front load if you invest more than $2 million.
If you don't have $50,000 or $100,000 to invest in the next 13 months, you can still get a discount on the front load through "rights of accumulation." Under the accumulation rules, when your total investments in one fund family have grown past the break points, you will get fee reductions on the front load. So, if you only have $20,000 to invest right now, that's fine. It will grow to more than $50,000 or $100,000 soon enough, and then you'll be able to get the load discount on your future investments.
The turnover ratio of a mutual fund can tell you important things about how much it costs and how it is run. Turnover ratios show how much trading is going on in the portfolio of the fund. They are found by dividing the fund's total sales for a certain amount of time (usually one year) by the total value of the fund's assets. This number shows how much the portfolio of the fund has changed.
When investing in a fund with a high turnover ratio, you might want to be careful. High turnover means that the manager of the fund buys and sells a lot. Since there is a commission for each sale and purchase, funds with high turnover ratios often have high costs. Some experts say that you should focus on funds with a turnover rate of less than 50%.
