Investment firms that manage mutual funds rarely do it for free. In order to turn a profit, they charge fees on the money clients invest into the funds, typically either a flat rate or a percentage of the total investment. These fees can be charged up front at the time of investment, periodically over the lifetime of the investment, or when the investment is withdrawn. Such details are contained in a fee table, printed as part of a mutual fund's prospectus.
A prospectus is essentially a detailed summary of a fund, including a range of information, from average historic returns to investment portfolio tendencies. It is offered on an annual basis to members of the mutual fund, and prospective investors. The fee table is a very important part of a prospectus, as it basically lays out how much an investment plan will cost, above the actual principal.
In the United States, the Securities and Exchange Commission (SEC) requires that mutual fund operators define each of the charges included in their fee table. Therefore investment firms cannot impose fees without offering some kind of explanation. The SEC does not, however, regulate how much a given fee may be. These tables typically include two categories of charges — shareholder fees and annual fund operating expenses.
Shareholder fees are comprised of a number of individual charges. These can include a sales load charge, which is essentially the commission fee that goes to a fund's brokers; a redemption fee, charged when shares are sold; and an exchange fee, which is imposed when a customer transfers funds from one mutual fund to another run by the same company. There may also be an account fee, which some companies charge customers whose balance is below a certain point, and a purchase fee, imposed whenever new funds are deposited into the account.
Aside from transaction fees and the like, a fee table usually also includes what is known as annual fund operating expenses. Investment firms draw their operating expenses directly out of their funds' assets, as opposed to levying separate fees. As a result, those expenses are indirectly passed on to investors, and are therefore required to be disclosed. Within this category are items such as management fees, distribution or service fees, and other delineated expenses. The sum of these lines is known as expense ratio, and is expressed as a percentage of a fund's overall assets.
The fee table contained in a mutual fund's prospectus is designed to allow for an 'apples to apples' comparison between it and other funds. This means prospective investors can shop around between different investment firms, and the funds they offer, to find the cheapest or best value fund. The spectrum of funds typically ranges from low-overhead models that are cheaper but offer fewer ancillary features, to full service funds that offer a number of research and analytical tools.
