Mutual funds are great to add to any portfolio and understanding how fees and charges are applied will better your return on investment. Mutual funds generally have management fees, 12b-1 fees, and other expenses that such as account fees. Lets break down the various ways that you could be charged by a mutual fund.

These are straightforward. This fee pays for the person that is managing your mutual fund. This fee can be found in the prospectus and tends to be in percentage form, from 5-8%.

These fees are a little harder to understand, but it is a fee that is simply charged to fund the marketing and selling costs.

Shareholders of a mutual fund can be charged account fees which are to maintain the account, or to charge you if your fund falls below a given amount. You can also be charged a redemption fee if you take your money out too soon after buying into a fund. This is to deter people from short selling. Exchange fees are charged when a shareholder decides to have their money transfered to another fund, even if it is with the same investment company. Finally purchase fees are charged when you buy into the fund. Note that these fees are charged continuously.

An example of a purchase fee is the load. It is the commission, or a sales charge that is either paid up front, yearly, or when you sell your shares. All mutual funds have them, and knowing how they will affect your investment is crucial to choosing the type of fund you will invest in. There are three different types of loads.

This fee is charged up front when you buy into the mutual fund. It is generally 2-5% of your purchase. So if you buy $2,000 shares with a 2% load then you will be charged $40 up front. This drops your investment to $1960. Not a bad load, but it can add up. This money goes directly to the broker you bought the shares from.

This fee isn’t charged unless you sell your shares within the first seven years of purchase. This load drops an average of 1 percentage point each year until it disappears completely. This type of load is obviously to deter people from selling short. However, Class B’s charge a higher annual fee than Class A’s and could be costlier to you depending on your investment needs.

This type of fund can be a mixture of Class A and Class B. It charges a level load throughout the years or it will charge a back end load if you sell the shares too soon. This Class also charges higher annual fees than Class A funds, and about the same as Class B funds.

You can buy no-load funds directly from the investment company to avoid the middle broker man. However, you are still liable for 12b-1 fees and all other account fees that are charged aside from the commission loads.

The FINRA Fund Analyzer is an amazing tool that breaks down all of these fees for you to help you choose a fund for your portfolio. “The Fund Analyzer offers information and analysis on over 18,000 mutual funds, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs),” according to FINRA.org. “The tool estimates the value of the funds and impact of fees and expenses on your investment and also allows you the ability to look up applicable fees and available discounts for funds.”  Simply look up the fund’s name, ticker or do a keyword search, select up to three funds and compare!

When looking for a mutual fund, decide how long you are going to stay with it. If you are long term investor that will stay in the game for more than 7 years, then a front-end load fund is a better choice. They have lower 12b-1 fees, and low annual expenses. Short term investors should invest in low front-end load funds or small back-end load funds with modest 12b-1 fees. They have the highest annual expenses but are still a better choice than no-front-end load funds. These types of funds should be avoided as they are really expensive with back-end fees. They also charge the maximum 12b-1 fees and have high annual expenses.