Bond Fund StructuresBond Funds
Bond Fund Fees
Your return from funds is partially based on how you pay, and how much you pay for them. Fund fees eliminate portions of your returns, so purchasing and holding a bond fund with high expenses won’t necessarily help you out. Bond funds, like mutual funds, have many potential fees structures. The problem is that bond funds are composed of bonds, which are low return vehicles. Expenses spent on commissions and fees cost higher percentages of your returns than they would with equity based vehicles. To get a decent return, you must hold bond funds even longer than equity based mutual funds. There are four basic fee types that are charged by funds: Operating Expenses, 12b-1 Expenses, Front End Loads, and Back End Loads.
Operating Bond Fund Fees
Operating expenses are the outlays a fund encounters running day to day. All of the basic costs of trading, administration, and fees are charged to operating expenses. The bill is never delivered to investors, but charged against assets found in the fund annually. When you are comparing operating expenses you should limit comparison in fee charges to bond funds within the same category. High operating expense funds depress earnings and reduce the effects of compounding. They will affect your returns more the longer the bonds are held. It’s especially important to select lower expense ratios in funds you will be holding a long period of time.
12b-1 Bond Fund Fees
12b-1 Charges are similar to operating expenses. These pay almost exclusively external costs, such as commissions to brokers, marketing, and advertising fees. These fees are charged in addition to loads or operating expenses and generally is unavoidable. They are limited by the US Securities and Exchange Commission to a charge of under a single percentage point for sale, service, and maintenance. Just like most of your expenses or charges, these fees are subtracted from the assets currently in the fund annually. You will never receive a direct charge for 12b-1 charges.
Front End Loads
Front End Loads are just another word for commissions. When you enter a fund with a front end load, you pay these sales charges in addition to the funds other costs. These are not an additional charge, but subtracted from your initial investment in the fund. If you place one thousand dollars in a fund with a five percent front end load, $50 will be taken from the investment as the fee. The rest will be invested into the fund. These charges are mostly directed to the brokers, and not the funds themselves. These funds can run up to 8% charges, but you should especially avoid high front end loads since they do absolutely nothing for the investment. It is possible to find funds without front end loads, known as “No-Load” funds. These should be preferred over other funds, all else equal. The longer a fund is held, the more time you can be compensated for the initial expense of the Front End Load, but loads should be avoided whenever possible. Don’t pay them unless it’s absolutely required.
Back End Loads
Back End Loads are a fee for cashing out. Like operating expenses and front end loads, you don’t actually receive a bill for these charges. If you sell your stake in a fund this charge deducts your money on exit. The back-end load is subtracted from the total amount of money sent to you. Back end loads are decreased the longer you hold the fund, a specific percentage every year. Eventually, some funds allow you to reach a zero percent load while others will always charge a minimum fee. Back end loads should be avoided whenever possible. They essentially reduce your earnings and increase the amount of time you must hold a fund to cancel out the loss with returns or interest.
The worst funds, in terms of expenses, will charge high front or back end loads, high 12b-1 fees, and a higher end expense ratio. The best funds, in terms of expenses, will charge no front or back end load, a moderate 12b-1 charge, and a lower expense ratio. Remember that higher fees will depress your earnings, and increase the amount of time you must hold the fund to break even or earn profits.
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