Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders

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Management of Financial Institutions - MGT 604

Lecture # 25

Mutual Funds

Cost of Ownership

Management Fee

All mutual funds, including no-load funds, have certain fixed expenses that are built into

their per share net asset value. These expenses are the actual costs of doing business.

They are deducted from the assets of the fund. It is advisable to check the prospectus to

determine the percentage of the fund's total net assets that is paid out for expenses.

Additionally, shareholder services provided by the fund, investment adviser's fees, bank

custodian fees, and fund underwriter costs also come out of the fund's assets. These charges

vary from fund to fund; however, they are clearly spelled out in the prospectus.

On a per-share basis, however, management expenses are usually quite small, because they

are spread over the tens of thousands, or the millions, of shareholders in the fund.

The formula for determining the cost of a fund's management expenses is simple: From the

current value of the fund's total assets subtract liabilities and expenses, and divide the result

by the number of outstanding shares. The fund's prospectus and /or annual reports often

provide this data. Management fees and expenses are usually expressed as a ratio of

expenses paid out to total assets. Generally, the prospectus will show these expense ratios.

Redemption Fee

All load funds levy a sales charge when purchasing shares. Some load and some no-load

funds also charge a redemption fee when you take money out (redeem shares). The

redemption fee is a percentage of the amount redeemed, usually 0.05% (1/2 of 1%).

Avoid funds with redemption fees. There are excellent funds available that will meet your

objectives and do not levy redemption fees.

Generally redemption fees are levied only with the intent to cut down on the number of

redemptions the fund experiences. The bottom line is that you are entitled to the full value

of the shares you redeem.

Switching Fee

Most, if not all, open-end mutual funds permit you to transfer all or any part of your

investment from one fund to another fund within its family. This kind of transfer is

commonly called "switching".

For many years there was no charge required switching funds. In recent years, however,

some funds have started to charge for switching. It is usually a flat fee. The few funds that

Management of Financial Institutions - MGT 604

are charging the investor for this service say it is to discourage too frequent moving in and

out of funds. Constant switching of funds increases the administrative costs involved in

keeping track of customer accounts made.

Maintenance Fee

Be on the lookout for a fee that is being assessed against the shareholder's account(s)

directly. It is called an "account maintenance" fee. According to prospectuses of the funds

that levy this fee, it is to "offset the costs of maintaining shareholder accounts."

The fee is deducted from the dividends to cover the maintenance fee, enough shares or

fractions of shares will be automatically redeemed from the account to make up the

difference.

Avoid funds that charge the investor a separate maintenance fee. The list below shows a list

of usual and justifiable fees charged by virtually all mutual funds. Expect to pay these fees;

they are minimal and necessary. On the other hand, the other fees about which for which

you need to take caution is not, in most cases, justifiable.

Customary Fees Charged by Most Mutual Fund Companies

Investment Advisory Fees:

The fund pays a set fee, stated in the prospectus, for investment management. This allows

the fund the use of the advisor's investment research staff, equipment, and other resources.

Administrative and accounting services, such as data processing, pricing of fund shares, and

preparing financial statements, are included in this fee.

Transfer Agent Fees:

The fund pays a set fee for each account for maintaining shareholder records and generating

shareholder statements, plus answering your phone inquiries and correspondence.

Audit Fees and Expenses:

Each fund is audited annually by an internationally recognized, independent accounting

firm which is not affiliated with the fund.

Custodian Fees and Expenses:

The Fund's assets, represented by stock certificates and other documents, are held by an

outside source for safe keeping.

Directors' Fees and Expenses:

The Fund's directors are compensated for their time and travel. The Board meets at least

quarterly, as a whole and in subcommittees, to review the fund's business. (Directors or

officers who are employed by the fund receive no compensation from the fund for serving

as directors.)

Management of Financial Institutions - MGT 604

Registration:

The SEC and various state securities agencies charge fees permitting a fun's shares to be

sold.

Reports to Shareholders:

Annual, semiannual, and interim reports are printed and mailed to shareholders on a

periodic basis.

Investment Fraud

Information is an investor's best tool when it comes to investing wisely and avoiding fraud.

And the best way to gather information is to ask questions- about both the investment and

the person or firm selling it. It doesn't matter if you are a beginner or have been investing

for many years, it's never too early or too late to start asking questions.

Too many investors who've suffered losses at the hands of swindlers could have avoided

trouble if they had only asked basic questions from the start.

This section will help you recognize and avoid different types of investment fraud. You'll

also learn what questions to ask before investing, where to get information about

companies, who to call for help, and what to do if you run into trouble.

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