Final answer:
12b-1 fees, also known as asset-based fees, are used to cover marketing and distribution expenses for mutual funds, and are typically deducted annually from the fund’s assets. There is a maximum fee of 1% of the fund's assets per year set by the SEC. These fees can impact the overall return on investment.
Step-by-step explanation:
12b-1 fees, also known as asset-based fees, are charges associated with mutual funds. These fees are used by mutual funds to cover marketing and distribution expenses, which might include advertising costs, payments to brokers, and other expenses for selling the fund's shares. The goal of these fees is to enhance the fund’s marketing efforts and potentially attract more investors. The fees are deducted regularly — typically from the fund's assets on an annual basis, which means they have the effect of reducing the overall return to investors.
There is indeed a maximum for these fees set by the U.S. Securities and Exchange Commission (SEC). The total 12b-1 fee cannot exceed 0.75% of a fund's average net assets per year for distribution and marketing, and an additional 0.25% for service fees, making the total cap 1% of the fund's assets annually. However, investors should be aware of these fees' impact on their investment returns over time, as they are ongoing charges.