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A purchase fee is a fee which is most commonly associated with a mutual fund. Purchase fees are used by the fund to defray expenses associated with purchases. They are collected when new members join a fund and wish to buy shares. Likewise, purchase fees may also be used by other financial institutions for similar purposes. The law typically limits such fees and requires that they be disclosed before a deal commences so that buyers understand what they are getting into.
Purchase fees are used to handle the expenses the fund incurs on behalf of investors. They come from the money people invest, and reduce the overall amount of the investment. The fees, however, are returned to the fund itself so they help generate money for members of the fund. The amount of the purchase fee is usually a percentage and funds commonly publish fee schedules which provide information about the fees associated with transactions.
The opposite of a purchase fee is a redemption fee, charged when people wish to sell shares. Like a purchase fee, the redemption fee is designed to provide compensation for the expenses which the fund must bear in order to facilitate the sale. For the individual investor, paying these fees may be viewed as preferable to trying to manage sales and purchases independently, and it also provides access to the pooled investments in the fund, which may generate higher returns than solo investments.
These fees are separate from sales charges, also known as front end loads. A sales charge is a fee charged at the time or purchase, but it is not applied to expenses incurred by the fund on behalf of clients. It a processing fee which provides the fund with compensation for undertaking the sale. Since intermediaries like mutual funds are providing a service, they quite reasonably charge for the service they offer.
Broker-dealers and other people who facilitate transactions on behalf of investors can also charge a purchase fee for their work. There are a wide variety of expenses associated with sales and purchases, ranging from fees associated with legal paperwork to the costs of maintaining a system which can be used for the administration of sales, purchases, and trades. Making the amount of the purchase fee explicit also allows the fund to show investors what percentage of their investment will be used for direct investment, and what percentage goes to fees and associated costs, so that people understand how their money will be utilized.
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