Expert: Gina Boykin - 7/6/2009

Question
Hello:

If an investment company, for example a mutual fund company, takes its management fees from an investor's account, does the company take its fees from the profits that were made or the entire amount invested?

The entire amount invested would be the initial invested amount, for example $100.00, plus the amount it earned, for example $50.00.

(1) If the management fee charged is 2.5%, would the 2.5% be taken from the $150.00 or the $50.00?

(2) And also, what percentage would the investor get?

I thank you for your reply.

Answer
Management fees are taken based on the entire fund balance, so the part an individual investor pays is based on the entire account balance as of the date or period used in the calculation.  So in your example, the fees would be charged on the entire $150 (fees of $3.75).  Even if the account did not make money (e.g. lost money and the account went below $100), the management fees would still be paid.  This is why it is always important to look at the fees when comparing which funds to invest in - it can make a substantial difference over several years because it reduces your earnings.  The investor keeps whatever is left after the management fees and any other fees are taken out. In your example, if there are no other fees, the account would still have $146.25