Definition Definition

What Is 12-1 Fee? Understanding 12B-1 Fees with Practical Example

What are 12b-1 Fees? 

12b-1 Fee is a payment that mutual funds may impose on their stockholders to cover production and sales operating costs as well as other stockholders' functions. These costs are usually used to compensate dealers who promote the fund for profits.

It's critical for shareholders to be fully conscious of these expenses and to seek to decrease them, as they can cut into your stock returns.

Understanding 12b-1 Fees

The Securities and Exchange Commission (SEC) established the 12b-1 fee in 1980 as a measure to assist investors. The charge was created to promote individual stocks and enhance revenues while lowering costs. Marketing and distribution costs, such as broker royalties, are covered by these payments. They are classified as annual operational expenses. Fees under Rule 12b-1 are usually just under 1% and are stated in a fund's documentation.

Organizations imposing 12b-1 fees think that with enough promotions and growing demands, they may help raise the value of the fund. Whether it is true is debatable though these fees, according to commentators, do little to improve a fund's worth or demand, allowing them to feel like an extra upcharge.

Practical Example

Nancy has put $2,000 into the HK Company Mutual Fund, which has a 20 percent annual rate of return and 1 percent yearly 12b-1 fees. She would have made $5800 in ten years. If the fund's 12b-1 fees were just 0.10 percent, she would have had $5980 after ten years—an increase of over $4,000. Even though it is critical to assess these fees between funds, it is also essential to be conscious of many other investment fees as well as the average cost ratio of a fund. That's because most stock funds may charge large maintenance, liquidation, or other fees to adjust low fees.

In Sentences

  • 12b-1 fee is a common term used in the investment industry to describe payments made to salesmen who distribute mutual funds and are excluded from the company's equity.


Category: Economics
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