Mutual Fund Fee Structures
Mutual funds and their fees, in particular front-end versus back-end loads. What exactly does this mean? I’m Clay, let me explain.
When I was new to the markets, mutual funds were definitely kind of intimidating because there’s all different types and there’s different fee structures, and well how exactly does it all work? And well first off if you’re not even sure what a mutual fund is, I’ll put a link down below where I talk about just a mutual fund in general. But I wanna get a little bit more advanced here and talk about the fee structure and how you actually pay for these mutual funds. And while there are little kind of nooks and crannies of how all this works, from definitely a general perspective, there is essentially two main big picture concepts of the framework of how these fees work, and it all has to do with the loads that they apply on them. And you have front end, you have backend.
Determining The Type Of Fee Structure
Really the question and the key question that you need to ask yourself. Whenever you’re looking at a mutual fund and trying to figure out okay, how does the fee structure, how does the commission structure actually work? Is just ask yourself this question right here. Okay well, when? So when is the key question to ask yourself? Because when you start to focus on when, that’s going to force you to focus on well a time aspect. Or in this situation, at what point in time are they going to charge me the fees? So when you go down that kind of pathway, you’re gonna figure out very quickly the type of fee structure that is being used.
Front End Fee Structure
So the first type that is very common out there is what’s called a front end. And maybe you can figure out exactly quote unquote when the fees are gonna show up. But with the word front, that means these are gonna happen at the start. Meaning when you invest your money, you are getting hit with a fee at the front end. So the location and time is boom, right away. So how does this actually work? Well let’s just say you have $1,000 and the front end fee is 6%. That means you are actually not investing $1,000. You’re gonna be investing $940, how so? Well remember if you have that fee, 6% times 1,000 is what, $60 right? So 60,000, or six, not $60,000, $60 is the fee to get started. Which means if you have to pay $60 to get started out of the 1,000, well then that again is where the $940 is coming from that you would actually be putting to work. Now sometimes out there they have low end fees, but it, low is just a matter of well, maybe instead of 6%, it’s at 2% or 3%. So don’t, when you hear the low or high or, it’s all about when is the fee actually being applied? So whether or not it’s low or high or any of that, that’s, put that all aside. The key question becomes at what point in time, when is the fee actually hittin’ me? And if there is any sort of front end, so even if it’s a front end low or front end what have you, the keyword there is front because that’s tellin’ you when exactly the fee is taking place.
Back End Fee Structure
The other type that exists out there is known as the backend. So again, I’m sure you can kinda figure out where that back, meaning you get hit at the end. So if you have $1,000 that you wanna put in, well you get to put in all $1,000. Now the kicker is that when you look to exit the mutual fund, so when you look to take out your investment, that is when the fee is gonna hit you. Now again this all varies from broker to broker, everybody’s got their different kind of, essentially their sales pitches, right? They’re trying to get you to invest in that sort of fund. So and that’s a good thing, when you have multiple mutual funds, people have to compete via the fees and all of that. So like I said, this is not a universal rule. But something out there that you’ll see is let’s just say that the backend is 5%. But what a lot, a lot of what people will do is for every, let’s just say every year, this will drop down. So if you keep your money invested for one year, then the backend for you becomes 4%. If you hold it in for another year, then that becomes 3% and so on and so forth. So that’s just an incentive for you to well keep your money invested with them longer and longer and longer. Now how can they do that?
Mutual Fund Operating Expenses
Well there’s another expense out there known as an operating expense. And the operating expense is just like what it, that’s not how you spell operating, but you get the point. Operating is just, we’re just gonna keep in business right? Because there are people behind the scenes that are running that mutual fund and all that. So even if that keeps getting lower and lower and lower, I mean the mutual fund, the company is still able to make money ’cause you have this expense down here that is still bringing in profits and that is still being reflected in the investment. So yes, the mutual funds have these loads that could exist, but if they’re, if the loads are very low, you have to keep in mind that there is that operating expense and for the most part the way that is calculated is they just take it out of the value of the fund. So instead of the value of the fund let’s just say being 100, maybe the value of the fund all of a sudden drops down to 99 and that one, wait, how did, you just said it was worth 100, how is it now worth 99? Well they took out some of that within the operating expense, so that’s kinda how they pull that part out. It’s not like they hit you with a fee straight up. Usually the value of the portfolio itself just declines by whatever that operating expense is.
Review Of Mutual Fund Fee Structures and Expenses
But this is how mutual funds are broken down cost perspective wise. Usually by the loads but again. So I started with this, I’ll end with it. The load, just ask yourself, when is this load being applied? You have front-end loads, you have backend loads and all that is telling you is when is that fee actually going to hit you? And you have all sorts of philosophies out there. Oh well front-end loads are better because. No no no no, backend loads are better because. So you have philosophies for everybody that says the front end load is the wise way to go about it, you can find somebody that says the backend way is to go about it. So I’m not here to tell you which is better, I’m just here to explain how you can look through all that, how you can determine what the fees actually are. So just focus on that word when and that’ll carry you right down the pathway that makes answering all these other fee questions much simpler.
First off, thanks so much for watching the entire video. Real quick, before you go I wanna invite you to a live webinar, web class, training, workshop, online event, whatever you wanna call it, but it will be me live revealing to you what I’ve discovered that has allowed me to transform myself from being an employee to being my own boss, including how I had only one losing day out of 73 days in total. I’m going to cover three keys that have helped me unlock profitable consistency within the markets. The first key is super weird but in a productive type of way. The second key is super awesome because it quite literally is wired into our DNA as humans, makin’ it very easy to use. But in a cruel way this becomes a pitfall for many traders. I’ll explain it all though, including how to avoid the pitfall that it creates for some. And yeah, the third key when you hear it sounds way too good, way too good to be true, but it’s not and I’ll show you how it all works. Then, at the end I open it up for a question and answer session that is again totally live. Even if you can’t make the live session, please still sign up as it will be recorded and you can go back and watch the replay that I will send you. Click the image on the screen or click the link down in the description box so you can get the date and time and claim your spot, which I should note is limited due to the fact that this truly is a live event. If you have any questions, let me know. If not, I’ll be seeing you soon.
The basics. What is a Mutual Fund? Learn more HERE