Understanding the 12b-1 Fee in Mutual Funds: What You Need to Know

The 12b-1 fee is a common fee associated with mutual funds. This fee is part of the expense ratio and is paid every year by the investors in a mutual fund. In short, the 12b-1 fee is a percentage of the entire assets of the mutual fund. This fee is collected as a means to pay for marketing, advertisements and distribution. Therefore, if you see a commercial for a mutual fund, or receive a mailer, this was paid for with a 12b-1 fee.

Contraversy

Initially, this fee was said to ultimately help the investors because it increased the funds overall holdings. However, many investors now look at this as a negative fee and will only do business with mutual funds that do not charge it. In reality, having more investors in a mutual fund with you does not really help you at all. In fact, having more investors can actually play against you as an investor. Once a mutual fund gets too big, the performance of the fund tends to suffer because they cannot move like it once did. Therefore, you should strongly consider whether paying these fees is a good idea for you. Depending on your school of thought, this fee can be very important.