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# Mutual Funds: Understanding the Costs

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Mutual Funds Expense Ratio

“What about the broker?” asked Edna.  ”Do they have broker in Mutual Funds who charges a fee?”

“Good Question!” replied the Financial Adviser. “When you buy and sell stocks all you have is a broker fee each way, in a mutual fund, you have a number of expenses which are all lumped together and called the Mutual Fund Expense Ratio”.

He explained that the Mutual Fund Expense Ratio includes the following:

• The cost for the Fund Manager is normally the largest part of the Mutual Fund Expense Ratio and run from 0.50% to 2% of your investment.
• Transaction Costs: Every time the mutual fund buys and sells a stock it is called a transaction.  What also happens is every time they do that, they have to pay the broker their fees.
• Capital Gains Tax: Just like we have to pay taxes when we make money in the stock market, so does the Mutual Fund.  Money made through investments is called Capital Gains.  Every time a mutual fund sells a stock, it pays taxes on the profits made.  So funds where there is a lot of buying and selling of the investments in the portfolio will have higher transaction costs and higher Capital Gains Tax.
• Custodian Bank Fees: A custodian bank is simply a bank that is tasked with keeping all the investments of the mutual fund safely. This is to make sure that nothing unscrupulous happens with the portfolio manager.  They also  do some other functions like pay taxes on part of the Mutual Fund. These are typically the smallest part of the Mutual Fund Expense Account.
• Marketing Fees: Amount spent to market the fund and get more investors to the fund.
• Transfer Agent Fees: A transfer agent is the person who is tasked with keeping track of which investors have purchased units or sold units in the mutual fund.

Once all the above items are added up, they are divided by the number of units of the mutual fund and charged to every unit holder.  It’s important to know what this amount is because it comes out directly from any profit the mutual fund may make.

Mutual Funds Sales Load:  This is the amount given to the person or company that convinced you to purchase the fund in the first place.  If the mutual fund sales load was 10% and you had invested \$1000, then you immediately loose \$100 (which is paid to the person who sold you the fund) and only \$900 will be invested into the fund!

Front Load, Back Load or No Load: This is another charge to look out for when you invest in mutual funds.

• A Front Load charge is a charge the Mutual Fund company charges you to invest in the fund. Think of it like an entry ticket to a fair. You have to pay before you enter.
• A Back Load charge is when the Mutual Funds fines you if you leave the fund. They normally do this to keep people in the fund longer.  Back Load charges are normally removed if you have invested for more than 5 years.
• No Load is when there is no front load and no back load.

>> Deciding which mutual fund to buy

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