Mutual Funds: Understanding the Cost Involved

by | Mar 27, 2013 | Podcasts, Financial Planning

In this week’s Mullooly Asset Management podcast Tom and Brendan talk about mutual funds. The focus of the podcast is open-end mutual funds. These are the most recognized type of mutual funds amongst investors, and are certainly more well known than closed-end funds.

There are three types of open-end funds that Tom and Brendan cover in the podcast. The three types are front-end funds, back-end funds, and low-level-load funds. Tom and Brendan explain the three types of front-end funds. They also discuss how ETF’s can be a nice alternative to mutual funds and part of a sound financial planning strategy.

Before getting into the three types of open-end funds, Tom and Brendan thought it would be useful to go over the two main fees built into most funds. The first of these fees are the management expenses. These pay for advertising, paying the fund manager, and trading costs. Sales charges are the second fee built into most funds. You can really see the cost of investing get out of control sometimes as a direct result of these sales charges.

Tom explains that front-end mutual funds are sold how mutual funds have been sold for a long time now. He describes them as “pay at the door” because you pay a one time sales charge and that’s it. Sometimes you can catch a break in these funds if you are investing a larger sum of money up front.

Back-end mutual funds have higher management expenses (on average) than front-end funds. In back-end funds you don’t pay a charge up front. However, if you try to get out of the fund there will be a deferred sales charge when you do so. 12b-1 fees are also assessed every year in back-end funds. Learn what these fees pay for by listening to the podcast.

Low-level-load mutual funds are newer than back-end and front-end funds. They have higher management expenses because there are no sales charges up front. If an investor sells the fund within the first 12 months there will be a 1% charge on the way out. Tom explains that there is a 12b-1 fee of 1% that hits EVERY year though.

Many brokers will tell you that, “All returns are NET of fees and expenses”. This is a true statement, but you should also keep in mind that this is 2013. Tom explains how in 2013 we can find plenty of ETF’s to do the same exact thing as most mutual funds. ETF’s offer a much lower pricing structure than most mutual funds, and are more efficient in most cases.

Make sure to tune in and check out this week’s Mullooly Asset Management podcast! You can learn a lot of useful information about the three primary types of open-end mutual funds.Mutual Funds vs ETF's chart

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