What are undeclared performance fees in mutual funds?

Undeclared performance fees in mutual funds refer to fees that are not explicitly outlined in the fund’s prospectus but are instead linked to the fund’s performance metrics. This means that while these fees are contingent on how well the fund performs, they may not be transparently disclosed, leading to potential misunderstandings for investors regarding the actual costs associated with their investment.

Performance fees generally serve as an incentive for fund managers to achieve higher returns. However, if they are not clearly stated, investors may be unaware of these additional costs, making it difficult for them to assess the true expense of their investment. In contrast, explicit fees mentioned in the prospectus provide clarity and transparency, allowing investors to make more informed decisions. The concept of fees being charged only during losses or being individually negotiated with fund managers does not apply here, as those scenarios do not accurately represent the nature of undeclared performance fees.