Mutual fund sales charges aren’t necessarily a burden, but they are a load.
Mutual fund providers may sell their shares directly to investors on their websites or through intermediaries including brokers, investment advisers, and financial advisers. Some providers make their shares available in both ways.
Direct sales are made without sales charges, known in the world of mutual funds as loads. So they’re called no-load funds. Funds sold through intermediaries are typically load funds, with sales charges in the 4% to 5% range.
In addition, many mutual funds, both load and no-load, including some index funds, charge 12b-1 fees to cover marketing, sales, and shareholder services costs.
Sales charges can be assessed at different times. When you buy a mutual fund with a front-end load, the fee is figured as a percentage of the amount you’re investing, often in the 4% to 5% range. Since the fee is subtracted up front, you actually purchase fewer shares than if no sales charge were levied. For example, if you’re investing $5,000 in a fund that has a 4% front-end load, you’ll actually be purchasing $4,800 worth of shares and paying a $200 sales charge.
Some brokers and investment advisers reduce the sales charge or don’t charge it at all, especially if they receive asset-based fees determined by the values of the client portfolios they manage.
Back-end load (contingent deferred sales charge)
You pay a back-end load on the other end of the transaction — when you sell shares. Unlike front-end loads, which are figured as a percentage of your purchase amount, back-end fees may be calculated in different ways, including as a percentage of the fund’s NAV. Also called a contingent deferred sales charge (CDSC), the back-end load diminishes over time, usually by about one percentage point each year you own the shares.
Back-end loads are less common than they once were because, in many cases, their fee structure makes them more costly to buy and own than front-end loads.
When to hold mutual funds?
Mutual fund companies try to encourage you to invest for the long term, using a variety of fees and charges as carrots — or sticks. One reason is to keep as much money as possible in the fund. Another is to limit transaction costs and the possibility of having to sell underlying investments at a loss if lots of investors want to redeem their shares at the same time. Major sell-offs affect the fund’s NAV and reduce returns for long-term investors.
One fee designed to make short-term trading and market timing less profitable is the early redemption, or exit, fee, which you’re charged if you sell your shares within a certain time frame set by the fund company. That period may range from five days to a year or more, depending on the fund. The fee you pay is subtracted from the proceeds of your sale.
Some funds also levy exchange fees, which they charge investors to move money from one fund to another. This fee is also designed to encourage investors to invest for the long term and discourage them from redeeming shares, thereby limiting the fund’s potential need to sell off underlying investments. While these costs may not be enough, by themselves, to rule out selecting a fund, they are worth considering.
Mutual fund class
Fund companies that offer several share classes identify them with letters, such as A, B, C, and I, or sometimes with titles unique to the sponsoring company. Each fund class has the same holdings, manager, and investment objective. But because of the differing fees and expenses, the returns for each class differ.
Class A shares have a front-end load and asset-based fees.
Class B shares have a back-end load but usually higher asset-based fees than class A shares.
Class C usually have neither a front-or back-end load but higher fees than other share classes and sometimes a redemption fee.
Class I shares — where I is for institutional — are the least expensive but require a large investment, often $1 million or more. They may be available to individual investors through their investment advisers or brokers.
You can log on to FINRA to compare the costs of different share classes of the same fund.
What is a breakpoint?
A breakpoint is the amount of money you need to invest in a mutual fund in order to qualify for a reduced front-end sales charge or no sales charge at all. Though that amount varies from fund to fund, a typical example is a half a percent (0.5%) reduction once you reach $25,000, another half percent at $50,000, and so on.
You may reach a breakpoint and qualify for a reduced fee with a one-time purchase. Or, if you, and in some cases you and members of your household, hold investments in the same fund or the same fund family, those cumulative assets may count toward the required breakpoint total.
Rights of accumulation allow you to qualify for a breakpoint discount by combining past and new investments in a fund. And a letter of intent allows you to reach a breakpoint by stating that you plan to reach the threshold with investments that you’ll make in the future. Funds aren’t required to offer breakpoints, but if they do, they’re obligated to make sure you get the reduction you qualify for. The reduced rates and the investment amounts at which they’re available are provided in the prospectus.
What Are Fund Sales Charges (Load)? by Inna Rosputnia
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