Should I Pay Mutual Fund Transaction Fees?
Mutual fund companies receive contributions from a large pool of investors and invest those funds in an array of vehicles, depending on the stated objectives of the fund. As with any business, there are operating expenses, but regulators, such as the Securities and Exchange Commission, scrutinize the activities of investment companies that operate mutual funds and ensure that they abide by regulations.
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Facts
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A mutual fund is owned by its shareholders but directed in its daily activities by the fund manager, so there is an agreement in place between the two parties. An investor is required to read and understand the fund prospectus--outlining all objectives and fees and spelling out the details regarding making share purchases or sales--before investing, and the fund is required to operate within the confines of its charter.
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Identification
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The transaction fee is charged by a broker to cover the expense of buying or selling shares of a mutual fund. Some mutual fund companies have relationships with brokerage firms and offer what are known as "no transaction fee" (NTF) funds. However, the broker is being compensated by the fund, rather than by the purchaser, and this expense is passed along to the fund's shareholders in the form of increased total operating expenses.
Considerations
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A mutual fund account cannot hold other securities an investor may own, but a third-party brokerage account can hold several types of investments, including mutual fund shares. If you have a portfolio with a brokerage firm, such as Merrill Lynch or Scottrade, you might prefer to purchase mutual fund shares through that firm in the interest of consolidation and convenience. However, a transaction fee might be charged, depending on whether the fund company has an arrangement to reimburse the brokerage firm for the cost of the trade.
Misconceptions
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Transaction fees should not be the sole factor in making a decision to buy or sell mutual fund shares. Some funds with high expenses have positive net performance results that justify increased fees. However, many produce inferior results, and high fees might be a cause. Inquire with your brokerage firm about any NTFs that are available.
Other Fees
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Fees associated with the purchase of a fund are called "loads," and the fund pays them to a financial professional as a commission for service and advice. But the expense of the load is ultimately borne by the shareholder, either immediately or over time. No-load funds don't charge these fees.
Other underlying fees associated with ownership of the fund are used to cover the internal operational expenses, such as the fund manager's salary, marketing costs and reporting and accounting activities.
References
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