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Mutual Funds and Fees

Question: Ever since I can remember, my parents always told me to put my money in certificates of deposit. So, throughout our 59-year marriage, my wife and I have always put our money in certificates of deposit – that is, until we were talked into buying shares in mutual funds by a local financial services company. These mutual funds looked very good to us based on the charts that we were shown, but now, seven months later, we have lost more than 40 percent of our investment and have just learned that in order to sell, we will lose another five percent. We understood that there were no fees involved in the purchase. We are each 79 years of age, live on Social Security and a small pension, and can’t afford this. Is there anything we can do to recoup the money we lost?

Answer: Probably not, but we hope that other readers will be able to avoid your misfortune by gaining a better understanding of what they are being sold before they sign the check. While we are confident that you did not intend to risk your principal or agree to a penalty when you wanted to withdraw your money, this is what you did.

When you purchase a “mutual fund,” you are actually buying shares in a common pool of securities and hoping that the fund managers will perform well. Some mutual funds offer various types of shares called “classes”. Because each class carries with it different fees and expenses, performance results will vary even though each class is invested in exactly the same way. Generally, these multi-class mutual funds can be purchased in Class A, Class B, or Class C.

Even though the purpose of the “class system” is theoretically to give the purchaser a way to choose a fee and expense structure appropriate to their investment goals, most of our readers tell us that they either never understood what they were buying or were not properly informed about the differences until it was too late. Although the prospectus for each fund explains these differences, it would take a Philadelphia Lawyer to understand them.

Class A shares charge you a “front-end sales load” – that is, you pay an up-front fee at the time your purchase the fund. Class B shares charge what is known as a “contingent deferred sales load” which is paid when you redeem your shares -- unless you hold your funds for a specified period of time. These “sales loads” are basically recovery of the commissions that are paid to the person who sells the fund. Although sales loads may not exceed 8.5 percent, most funds do not charge the maximum.

But wait, there’s more! All mutual funds – even those which are called “no-load” funds -- charge other fees and expenses that, in some instances, can exceed four percent of your account per year.

For example, if you read the fund’s prospectus under “Shareholder Fees,” you will find customer transaction fees, advisory fees, marketing expenses, brokerage fees, custodial fees, and legal and accounting fees.

And if you take a look at a the “Annual Fund Operating Expenses,” you will see that you are also being charged a pro-rata share of the fund’s operating expenses which include management fees, and more.

Taking the NextStep: Since fees and expenses vary from fund to fund, before your make the purchase, be sure you understand exactly what fees you will be paying from your investment each year and whether or not you will be penalized if you sell your investment. Find out if you will be charged to move into another fund. Take your time, try to read and understand the prospectus or have it explained to you, and ask questions of the person who is trying to sell you the fund to make sure your investment goals are being met. And should you be told that the mutual fund you are purchasing does not charge fees, don’t believe it.

Need more advice or help with this topic? Click here to get information about taking the "Next Step".

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