Investment Advisor Compass | Things to Know About Fund Fees

（Source: Shanghai Stock Exchange ETF Home）

Source: Huatai Securities Contribution

Investing in a fund generally involves these actions: buying, holding, and selling. Based on the classification of investment actions, fund fees are divided into transaction-type fees (buying, selling) and operation-type fees (holding). Among these, transaction-type fees mainly include subscription fees, issuance fees, redemption fees, and so on. Operation-type fees mainly include management fees, custody fees, sales service fees, etc. Recently, mutual funds have been reducing fees in public offerings; what they are mainly reducing are management fee rates and custody fee rates among the operation-type fees.

PART 1

Transaction-type fees

In fund investing, transaction-type fees—such as subscription fees, issuance fees, and redemption fees—are generally paid in a lump sum at the time of trading.

01 Issuance fee / Subscription fee

The issuance fee or subscription fee is the service charge paid when buying a fund. The issuance fee applies to newly issued funds, while the subscription fee applies to existing (older) funds.

The issuance fee rates and subscription fee rates differ across different types of fund products. For example, for actively managed funds, the issuance/subscription fee rates are generally higher than those of passive index funds; for equity funds, the issuance/subscription fee rates are generally higher than those of bond funds.

At the same time, some funds’ issuance/subscription fee rates are also linked to the issuance/subscription amount. The larger the amount, the more certain discounts the corresponding fee rates may have.

02 Redemption fee

A redemption fee is the charge investors must pay when selling a fund product. The redemption fee level is closely related to the holding period. To encourage long-term investment, generally the longer you hold a fund, the more the redemption fee rate steps down. If the fund is held for less than 7 days, the redemption fee may be as high as 1.5%. The longer the holding period, the lower the corresponding redemption fee may be.

Figure: Redemption fee rate for share class A of a certain public offering fund

Data source: Tohunt, Shuangxin Research Institute.

PART 2

Operation-type fees

Operation-type fees refer to the expenses incurred during the operation of a fund, generally accrued on a daily basis and deducted from the fund’s assets, including fund management fees, custody fees, sales service fees, etc.

01 Management fee

The fund management fee is the compensation paid to the fund manager, accrued based on the fund’s net value. Generally, the fund company sends an instruction for settlement and payment of the management fee to the fund custodian; after the custodian reviews it, the amount is paid from the fund property to the fund manager.

02 Custody fee

A custody fee is the fee charged by the fund custodian for the custody and handling of fund assets. Fund custodians are generally banks, securities firms, and so on. Custody fees are typically accrued based on the fund’s net value, accrued daily, and paid monthly.

It is worth noting that management fees, custody fees, and the subscription/redemption fees mentioned earlier differ: subscription/redemption fees are deducted from the investors’ funds, whereas management fees and custody fees are paid from the fund assets and do not need to be charged to investors separately.

03 Sales service fee

Sales service fees are generally a charging model for fund C share classes. It is equivalent to converting the subscription/redemption fees collected once at the outset into an annual charge accrued daily.

Author:

Li Xiaowen S0570622090031

Wu Chunyi S0570619110030

Contact: Liu Guochi

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