Fees have become one of the most controversial topics in the mutual fund industry.
Critics say that some funds have quietly added fees--such as so-called "12b-1 fees" and deferred sales charges--that are not readily apparent from reading the funds' prospectuses.
Here is a brief guide to mutual fund fees:
Management fees. All funds charge these, typically between 0.5% and 1.25% per year, depending on the nature of the fund.
Loads. These up-front, one-time sales charges can go as high as 8.5% of your investment. That means that for each $1,000 you invest, you will pay as much as $85 off the top, leaving only $915 actually working for you. So-called low-load funds usually charge between 2% and 4%. The nation's largest fund, Fidelity Magellan, charges a 3% load.
12b-1 fees. These fees, named after the federal rule that created them, cover advertising and marketing expenses, and typically range up to 1.25% per year. Because they are charged annually, they cut into your annual yield.
Critics contend that it is unfair to force investors owning shares in a fund for years to continue to pay this fee each year, long after they have paid their fair share of the fund's marketing costs.
Critics also contend that 12b-1 fees--by helping a fund attract new investors through advertising--actually could hurt fund performance. That is because larger funds may not be as flexible as smaller funds in adjusting their portfolios to take advantage of market opportunities. And unlike management fees, 12b-1 fees do nothing to reward portfolio managers for good performance.
Deferred sales charges, also called back-end loads. Charged when you sell shares in a fund, they start as high as 5% and decline gradually the longer you have owned the fund.
Studies generally have shown that there is little or no difference in performance on average between load and no-load funds. But when one factors in the amount by which a load reduces the initial investment, no-load funds generally do better.