Fees are not generally welcomed by the individuals who are spending money on achieving an intention or buying a product. If, as a customer, you are purchasing an item, you will look for the agents who charge the lowest handling fees, shipping charges or service taxes. This is because fees are constructed for benefitting the side that carries out a task or lends out a product or service, to serve as their income or to account for the expenditure they incur on providing the service. An investor prefers to purchase a security for investment directly from the issuing company if he is well-versed with the methodologies, in order to avoid spending more non-refundable money to any helping agent in between.
There is a type of fee, constituting the expense ratio in the mutual fund system running on cash plays, known as the 12B-1 fee, introduced to help the investing side.
Why and how is it levied from the investor?
The fee is considered as an operational expense, used for aiding in the operational efficiency of the fund and the investor owning the fund. It is used for the marketing functions and distribution services, usually on an annual basis and fixed at a percentage between 1 and 0.25 of the net asset of the fund under question.
The fee covers charges under two sections: 1) Fees for distribution and marketing of the funds, making up 0.75% of the expense 2) Service fee, completing the remaining 0.25%. Among the shares sold with the help of brokers, Class B and Class C take the 12B-1 fee on a more usual basis.
What is expected to be its purpose?
The 12B-1 fund is collected with the aim of using it for the marketing and increasing the publicity of the securities and the security holder, with the intentions that the measures will increase the worth or asset value of the fund and hence benefit the investor on a long-term basis. The earning on the invested fund and the assets associated with it is expected to outrun the expense borne by the investor, a concept under the economies of sale.
The present-day economic tactics have devised several hand methods to improve an investor’s return on the securities purchased and also the companies issuing them. Therefore, the actual draining destination of 12B-1 Fee is yet to be completely elucidated. It is estimated that currently, a major share of this fee is utilized to pay the agents and intermediate functionaries of the mutual fund who help in selling and trading of the assets.
How it aids in improving the performance of the fund as such is the factor where the controversy persists.
The fees collected under this section is on the ground used for covering the expenses related to promoting the funds by advertising them on personal and public media through emails, brochures and newsletters and even direct interaction. The service fee, on a high note, is used to pay for the answering of queries and information broadcasting and also the other incidental expenses like legal and administrative procedures. Mutual fund investment is no longer an area limited to the roles of just the buyer and the seller.