Here is a detailed explanation of each.
There are two main types of load fees, a front-end load which occurs when you buy shares of a mutual fund, and a back-end load which occurs when you sell shares. A front-end load is the most common type. These fees can be as high as 5.0%, and are generally not lower than 1.0%. For example, the PIMCO Total Return Fund A Shares have a front-end load fee of 3.75%. This fee gets taken out immediately of the initial investment and generally goes to pay the financial advisor “recommending” the fund.
If a financial advisor recommends buying a mutual fund with a load fee, Learn Bonds recommends changing your advisor. The major online brokers (such as E-Trade) all enable you to buy thousands of mutual funds with no load fees. Usually, mutual funds with load fees have a class of shares with no load. In the case of the PIMCO Total Return Fund, one can buy the D shares with no load.
Similar to when you buy a stock or bond through a brokerage firm, sometimes there is a fee for processing the bond mutual fund transaction. However, there is often no fee when going through an on online broker. They all have preferred mutual funds where there is no fee for buying or selling shares of the mutual fund. If one does not choose a preferred fund, the fees with online brokers are generally under $76 to buy and free to sell.
The average expense fee (called the annual expense ratio) for bond mutual funds tracked by Morningstar is 0.998%, basically 1.00% of the assets of the fund. The average is slightly higher for taxable bond funds at 1.01% and slightly lower for municipal bond funds at 0.97%. In this low interest rate environment, expense fees can substantially reduce returns. If one thought of the expense fees as reduction of income (yield), the expense fee for many popular bond mutual funds would reduce yields by about 28%.
There is a good deal of variation in annual expense ratios. For bond mutual funds, the expense fees range from 0.02% to 3.18%. Most people will not qualify for the lowest fees which have conditions like $1 million minimum investments. However, one should be able to find a great funds with a fee between 0.40% and 0.75%. The PIMCO Total Return Fund D shares had a 0.75% annual expense fee last year.
Expense fees include the management fees, administrative fees, and 12b-1 fees (for marketing and distribution). They don’t include the loads fees or brokerage fees described above.
We recommend visiting Morningstar.com. They provide great information on expense fees when you know the symbol for a fund. Keep in mind the Following:
This lesson is part of our Free Guide to the Basics of Investing in Bond Funds. Continue to the next lesson here.Want to learn how to generate more income from your portfolio so you can live better? Get our free guide to income investing here.