Apart from sales fees mutual funds also charge a fixed percentage of total assets under management on yearly basis. Unlike transaction fees these fees are not directly charged to investors but are deducted from the assets. This cost information is listed in the prospectus of a fund. This fees is charged to meet the below expenses
Portfolio Management Fees
Distribution charge (in the U.S)
Other expenses
Portfolio Management Fee is charged to meet Portfolio Manager, research specialists and other employees’ salaries. This charge is high for growth funds in comparison to debt funds since more research is required to find out potential growth stocks. For Index funds it is very less as there is no research is required literally.
Distribution Fees is 12b-1 charges relevant to the U.S. market. This fee covers ongoing distribution cost, agent fees, marketing expenses etc. This is zero for some funds.
Other Expenses include custodian charges, Transfer Agent charges, independent accountant charges and director charges.
The sum of the above expenses is usually expressed as a percentage of Assets Under Management (AUM) and is called as ‘Expense Ratio’. Expense Ratio is an important figure one should carefully look at before choosing a fund because the profits earned against your investment deducted by this percentage.
