By now you’ve recognized the wealth-building potential of mutual funds, and realize it is the one way you can make enough passive income to help you in your long-term financial goals.

At the same time, there are costs associated with investing in mutual funds. Fees or commissions for investing in or selling shares of a mutual fund may be assessed. Additionally, depending on how the fund allocates earnings or profits to you, taxes may be assessed as well.

Front, Back, or No Fees

Fees are dependent upon the source of your investment, and may be assessed at different times. If you purchased shares of a mutual fund from a broker, you will pay a commission. Fees that are charged at the time of purchase are considered front-end load. Morgan Stanley notes broker commissions are typically 2-5% of the amount invested, while OSU suggest they can be as much as 8.5%.

On the other hand, a fund may charge fees for redemption or sale of your shares. Such fees that are assessed at the end of your investment in a fund are back-loaded. OSU notes that some funds have progressively-lowered back-loaded fees that diminish the longer you maintain your investment.

If you purchase shares directly from a mutual fund company, no commissions will be assessed from your purchase. Direct purchase funds are considered no-load funds. There may be fees charged for sales and marketing cost that the mutual fund company can charge, though they may be lower than fees assessed in front-end and back-end loaded funds.

Taxes

You can be charged capital gains taxes at different times. First, any income derived from dividends and interest due to the fund’s stock or bond holdings may be passed on to you as a shareholder. You are likely to be taxed on this amount as it is income for you. Additionally, you may be taxed when your fund distributes capital gains derived from the sale of securities in the fund after capital losses are deducted. Finally, you can be charged capital gains taxes for sale of mutual fund shares that have increased in value.

Keep in mind that no investments are insured are guaranteed, and there are no strategies that will always ensure returns on investment. Additionally, everyone has a certain level of risk tolerance that will affect their decision making. If you are unsure, you can talk to investment professionals for advice on your investment goals.

References


Ruth Anne Mears. Start With Mutual Funds

Westcore Funds. Mutual Funds Basics

money.howstuffworks.com. How Do Mutual Funds Work