What is the primary purpose of management fees in mutual funds?

The primary purpose of management fees in mutual funds is to compensate the fund manager for their expertise. These fees are critical because fund managers are responsible for making investment decisions, managing the fund's portfolio, and conducting research to maximize returns for investors. Their expertise and skills in navigating the market directly influence the fund's performance.

Management fees are typically calculated as a percentage of the total assets under management and are essential for covering the costs associated with running the fund, including salaries, research, and administrative expenses. This compensation structure aligns the interests of the fund managers with those of the investors, as effective management can lead to better returns for the fund.

While transaction costs and marketing expenses are important considerations in mutual funds, they are not the primary reason for the existence of management fees. The provision of returns to investors is indeed a fundamental goal of mutual funds, but the mechanism to achieve this involves the expertise of fund managers, which is specifically what management fees are designed to compensate.