Define 12b-1 Fee:

"The 12b-1 fee is a type of fee charged by some mutual funds to cover distribution and marketing expenses. It is named after the Securities and Exchange Commission (SEC) rule 12b-1, which allows mutual funds to charge shareholders for these costs."

Explain 12b-1 Fee:

What is 12b-1 fee?

The 12b-1 fee is considered an operational expense and is included in a mutual fund's expense ratio. It is expressed as an annual percentage of the fund's average net assets. The fee is deducted from the fund's assets before calculating the fund's net asset value (NAV), which directly impacts the returns received by the investors.

The primary purposes of the 12b-1 fee are to compensate brokers and financial advisors who sell the fund and to cover advertising, marketing, and distribution costs to attract new investors. In some cases, the fee may also be used to cover shareholder servicing expenses.

It's important for investors to be aware of the 12b-1 fee, as it affects the overall cost of investing in a mutual fund and can impact the fund's performance over time. Different mutual funds may have varying 12b-1 fee structures, so it's essential to review a fund's prospectus and disclosure documents to understand the specific fees associated with it.

Example:

let's consider a hypothetical mutual fund with an annual 12b-1 fee of 0.50%. This means that the fund charges its shareholders 0.50% of the fund's average net assets each year to cover distribution and marketing expenses.

Let's assume the mutual fund has $10 million in assets under management (AUM) at the beginning of the year. Throughout the year, the fund incurs marketing and distribution expenses, and the 12b-1 fee is calculated based on the average net assets over the year. At the end of the year, the fund's AUM has grown to $11 million.

To calculate the 12b-1 fee for the year:

1. Calculate the average net assets: Average Net Assets = (Beginning AUM + Ending AUM) / 2 Average Net Assets = ($10,000,000 + $11,000,000) / 2 Average Net Assets = $10,500,000

2.  Calculate the 12b-1 fee amount: 12b-1 Fee = Average Net Assets * 12b-1 Fee Percentage 12b-1 Fee = $10,500,000 * 0.005 (0.50% expressed as a decimal) 12b-1 Fee = $52,500

In this example, the mutual fund would charge its shareholders a 12b-1 fee of $52,500 for the year to cover distribution and marketing expenses.

This fee would be deducted from the fund's assets before calculating the net asset value (NAV) and would impact the returns received by the investors.