What is a 12B-1 Fund?
Investing in diverse financial assets aids you in augmenting your accumulated wealth. If there’s any such asset class that boosts your income levels, it’s mutual funds. They are an amalgam of both equity and debt. There are 2 types of funds in mutual funds, i.e., passive funds and active funds. Each fund is allocated to a respective fund manager who is responsible for the growth and development in the fund.
In passive funds, there’s less partake by the fund managers, as these funds mirror the indices in the market. From fund initiation to generating returns on the fund, the fund manager is wholly responsible. Now, to manage a fund, the fund manager requires cash. That’s when a 12B-1 Fund was formed. Let’s dive into the specifics of this fund in detail.
What is a 12B-1 Fund?
A 12B-1 Fund is a mutual fund that collects charges from the investors in the form of 12B-1 fees. As managing a fund requires marketing and distribution, researching, analysis, promotions, sales, and more, the 12B-1 fees levied is used to meet the aforementioned fund expenses.
This fee also includes the fund manager’s commission for putting efforts for developing and selling the fund. Since 12B-1 Fee is an operational expense for the management, it’s treated as a part of the expense ratio of the fund. This annual fee is also manifested in the prospectus. The fees cover all the expenses related to the fund.
Uses of 12B-1 Fund
The 12B-1 fee amassed by the 12B-1 fund is used for marketing and distribution of the fund. Also known as level load, this fee is paid as a reward to compensate for the sale. The marketing and distribution aspects include promoting the fund, advertising, printing, paying fee to the brokers as a commission for selling the fund, and sending prospectus via mail to the investors. Regardless of whether you buy the fund from the stockbroker or as 401(K), you have to pay the 12B-1 fees to the mutual fund. The fee depends on the type of share class (class A, B, C) you buy in the fund.
Rules of 12B-1 Fund
The shares are classified into three types, namely, Class A, Class B, and Class C. Each of them have varied entry or front-end load and exit or back-end load. These loads are called service charges and they are charged differently based on the share and fund preference. The 12B-1 fund fee can be a maximum of up to 1% of the total assets of the fund. As per FINRA (The Financial Industry Regulatory Authority) rules, the 12b-1 fund fees should be anywhere between 0.25% to 0.75% of the net asset class of the fund. You can avoid paying exit load on mutual funds if you could hold for a long period.
Wrap-Up
Managing a mutual fund requires cash to operate the whole fund effectively. The 12B-1 Fund accumulates the cash from investors and caters to the fund needs. Generally, all the mutual funds reveal these fees to the investors. So, you can easily find them in the prospectus sent or issued to you.