Several charges are associated with mutual funds, although they need not all apply to every fund. Charges are the costs that investors pay for the administration and management of their investment, applied in one of three ways:

  1. as part of the share or unit price paid upon entry to the fund;
  2. as a direct charge rendered separately from the amount of the investment;
  3. paid from the property (assets) of the fund.

In most countries, the regulations will seek to ensure that excessive charges are not levied and will require fund managers to disclose both the current and maximum rates of their charges, how they are calculated and applied, and generally require that they are fairly and clearly explained to potential investors.

FundsFront-end, sales, initial or preliminary charge

This may be imposed when an investor buys shares or units, and is often included in the price. It is intended to cover the costs of marketing the fund, such as advertising, promotional mailing and commission paid to sales agents or intermediaries.

In the UK, this charge can be quite high by comparison to other jurisdictions (as much as 5% or up to 7% of the amount invested in an equities fund, but considerably lower for a bond or money market fund) but, as elsewhere, and particularly in the USA, competition in the investinent industry has given impetus to a trend for ‘no-load’ funds, where front-end charges are reduced or abandoned.

Dealing commission

If the investment is bought or sold through a stock exchange, the stockbroker will charge a normal commission.

Annual, periodic or management charge

This is the principal income of the management company and is usually paid from the property of the fund, spread over the year and based on the value (NAV) of the fund. It covers the management company’s costs of investment management and administration, and is typically between 3/4% and 2% pa, varying according to the type of fund.

Withdrawal, exit or redemption charge

The withdrawal charge (also known as an exit or redemption fee or charge) may be applied when all or part of the investment is sold, instead of, or in combination with, the initial charge. Its purpose is to encourage investors to remain invested for a reasonable period or, put another way, to discourage early redemption. It is often imposed according to a sliding scale, for example:

Sell within (years) Charge
1

5%
2

4%
3

3%
4

2%
5

1%
5+

none

Third parties’ fees

If a custodian, depositary or trustee is required to safeguard the property of the fund, they will charge fees that are paid from the fund or by the manager. Similarly, in some countries a registrar’s or transfer agent’s fee is paid to the company that maintains the register of share or unit holders.

Commission and other charges

Some fund managers sell their products through intermediaries, and pay commission. This is not an extra cost to the investor, but is either absorbed by the manager or covered by the initial charge. Some intermediaries waive this commission to increase their client’s investment, preferring to charge fees to their client instead. The maximum rate of commission and its disclosure arc both subject to regulation in many Countries. Other charges may include amortisation of set-up costs and of any immovable assets (e.g. office buildings) owned by the fund.

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Common Charges On Mutual Funds