As with any business, running a mutual fund involves costs. For example, there are costs incurred in connection with particular investor transactions, such as investor
purchases, exchanges, and redemptions. There are also regular fund operating costs that are not necessarily associated with any particular investor transaction, such as investment advisory fees,
marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants fees.
Some funds cover the costs associated with an individual investor’s transactions and account by imposing fees and charges directly on the investor at the time of the transactions (or
periodically with respect to account fees).
Funds typically pay their regular and recurring, fund-wide operating expenses out of fund assets, rather than by imposing separate fees and charges on investors. (Keep in mind, however, that because
these expenses are paid out of fund assets, investors are paying them indirectly.)
As you might expect, fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can
translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then
after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858.