Mutual fund fees explained: Two costs that eat up your investment return

Two weeks ago, I wrote this blog post about management expense ratios (MERs) -- the amount you pay every year to own your mutual funds. However, MERs aren’t the only cost involved in owning a mutual fund. Here are two other potential costs you should be aware of and, in some cases, avoid altogether.

1. Sales charges
In mutual fund-speak, sales charges are called “loads” and they’re what you pay when you buy or sell shares of some mutual funds. In the case of a "front-end load", you pay a fee when you buy your shares – up to 5% of your total investment in the fund. A "back-end load" is a charge that you pay when you sell your shares – up to 6% of your total investment in a particular fund. They're also known as a "deferred sales charge" and usually diminish the longer you hold on to your fund.

After a certain number of years – say, five to seven – you won’t have to pay anything to sell your shares. The problem is, if you’re unhappy with how your fund is doing or you want to move your money sooner than that, you can end up getting charged quite a bit depending on when you decide to cash in your shares.

You might also encounter “low load” charges with lower sales charges (up to 3%) and lower redemption fees when you sell. Finally, there's "no-load funds" that don’t have any fees to buy or sell – but beware, because sometimes no-load funds come with higher MERs so make sure you check all the fees before you buy.

2. Trailing commissions
Also known as trailer fees this is a mutual fund industry word for a fee or commission that you pay each year to the company that sold you the fund. It’s charged year after year for as long as you hold your shares. It comes out of the MER and ranges from 0.25% to 1.5% of the value of your investment each year. It goes to paying for the services and advice the company provides through your advisor.

Fee-only advisors
Of course, you don’t always have to pay commissions or sales charges on the mutual funds you buy. If you go through a fee-only advisor for example, you’ll just pay your advisor for their services every year, without having to worry about buried or hard to understand fees.

To find out more about mutual fund fees the Investor Education Fund has tools and tips to help.