Tag Archives: Annual Expense

Investment Companies – Mutual Funds (Part 2)

Welcome back for another installment of #FinanceFriday! Today we’re continuing our conversation about mutual funds. If you missed part 1, click here and catch up.

When people talk about mutual funds, they are more than likely talking about open-end mutual funds. Shares of open-ended mutual funds are bought and sold directly from the investment company, not from other investors. This means that all transactions are made in the primary market. The price per share is set one time per day at the end of trading and cannot be sold for less that it’s net asset value. All trades are processed overnight and most transactions have a T+1 settlement, which means the transaction is finalized (and you get charged for the shares) in 2 days (1 trading day plus one additional day). When looking for mutual funds in the market, mutual funds have a symbol (or quotron) that is composed of 5 letters with the last letter being “X”.

As with any investment, mutual funds have fees and expenses. The annual expense ratio is given as a percentage of the portfolio and includes management fees (which can be about 3/4 of your annual fee) and administrative or operating expenses. The higher the expense ratio, the lower the return will be. Mutual funds also have early withdrawal fees and redemption fees.

There is one more expense that may occur when investing in mutual funds, the load. The load is a sales commission that goes to the local representative of the mutual fund. Luckily, not all mutual funds have a load. The types of loads include: front-end (A), deferred or back-end (B), other letters (C, R, I, etc.), and 12b-1 fees (annual load). Mutual funds with no sales charge or load are referred to as no-load mutual funds. However, no-load mutual funds still have an annual expense fee to cover management and administrative costs. NOTHING in life is free, lol.

We’ll stop here and continue the series next week talking about the variety of mutual funds. I’m making an effort to make these articles shorter so they can be more easily digested and quick to read. Please let me know if you have any suggestions or questions by emailing me at NsideMyBox@gmail.com or on Twitter. See you next time!