Understand Mutual Fund Expenses

Are you familiar with the charges imposed by the mutual funds you own? Since fund expenses affect your investment return, understanding the costs is an important step in making sound investment decisions. Here are some common charges you'll want to know about before you invest.

• Load. A load is a sales charge imposed by the fund. You might think of it as similar to the fee you pay a broker to purchase a stock. Mutual funds fit in two broad categories: load and no-load.

Load funds include front-end, back-end, and level-load. A front-end load, as the name implies, is charged when you make your initial investment. A back-end load is charged when you sell your investment before a specified period of time has passed. A level-load charges you an ongoing fee (for instance, 1% per year) as long as you own the shares. A no-load fund has no sales charge. Keep in mind that no-load is not the same as no-fee. No-load funds can still charge purchase fees, redemption fees, exchange fees, and account fees. Look for information on fees and charges in a fee table located near the front of a fund's prospectus under the heading "Shareholder Fees."

• Expense ratio. The expense ratio tells you the cost of operating and managing the fund. These costs include marketing fees (sometimes called 12b-1 fees), management fees, administrative fees, operating costs, and other asset-based costs incurred by the mutual fund. A high expense ratio can hurt your overall return.

• Turnover and taxes. A fund's turnover ratio indicates how often the fund buys and sells stocks. A high turnover ratio reflects active trading. Because funds pass capital gains through to shareholders, active trading could result in taxable income for you. A low turnover ratio indicates a "buy and hold" strategy that can postpone the tax bite.

If you have questions about mutual fund terminology, give us a call.