Expenses-360

Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds

Page 360

someone is you, the fund investor. You didn’t think that owning a fund was all peaches and cream? Worse yet, unlike stocks or bonds where you pay a commission to get in or to get out, most funds have cost structures with levels and layers that could get complicated to keep up with. Most are spelled out in the prospectus but they could be pretty intimidating if you are just used to paying straight commissions for your stocks. With that in mind let’s take a look at the various elements of a fund’s expenses:

Sales Loads — Sales loads or loads, as they are referred to, are normally one-time fees that are charged when an investor buys into a fund and are mainly charged in percentages. Loads are also referred to as sales charges. They include:
Front-End Load — Also known as the initial sales charge, this is a fee charged when an investor purchases shares in a fund. The price of these funds are sometimes quoted as POP (Public Offering Price), which is their NAVs plus their front-end loads per share. Front-end loads vary depending on the fund and could range from 1% to 10% or more of the total amount invested. So investing $10,000 in a fund with a 5% front-end load would cost you an immediate $500 just to get in. Mutual funds with front-end loads are also referred to as class A shares.
Back-End Load — Also known as the redemption fee, exit fee, or the deferred load, this fee is charged when an investor cashes out of the fund. It could also vary depending on the fund, perhaps between 1% to 10% or more on the amount taken out. Many funds that charge back-end loads use a graduated approach. This means that the longer an investor has held their fund shares, the less in percentage terms they pay in back-end loads. This is designed to discourage investors from selling their shares shortly after buying in — in other words, to encourage them to be long-term investors. As investors sell their shares, the funds must also reduce their holdings accordingly and this costs them money, something they like to avoid. So, for example, a fund may charge a 5% …

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