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Mutual funds can be a valuable addition to your investment portfolio, offering simplicity, diversification, and potential returns. However, it’s important to understand the various fees associated with mutual funds. This guide will help you navigate the different types of mutual fund fees and how they work.
Mutual funds charge fees to cover operating costs and other expenses. Actively managed funds typically have higher fees due to the involvement of a portfolio manager who strategically trades securities to outperform a targeted stock market index, such as the S&P 500. In contrast, passively managed funds aim to match the returns of their market index and generally have lower fees.
Mutual fund fees fall into two main categories: those based on your investment choices and those charged to all account holders.
The expense ratio covers annual operating costs, including administrative expenses, technical support, and compensation for the fund manager and staff. According to Morningstar, the average expense ratio for actively managed funds in 2022 was 0.59%, while it was 0.12% for passively managed funds. This ratio may include:
Actively managed mutual funds often charge load fees, but you can choose no-load funds to avoid these fees. However, no-load funds still have operating expenses and other potential fees. One advantage is that their 12b-1 fees cannot exceed 0.25%. Note that no-load funds do not have a manager making investment decisions for you.
Mutual funds offer different share classes, each with its own fee structure:
To compare mutual fund fees:
Mutual fund fees vary widely, especially between actively and passively managed funds. High fees do not guarantee better returns, so it’s crucial to read a mutual fund’s prospectus to understand its investment style and past performance. As you build your investment portfolio, remember to prioritize your credit health. Check your credit report for free with Experian.
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