CFP

Characteristics, Uses and Taxation of Investments - Mutual Fund Expenses



3. Mutual Fund Expenses - note that NASD rules prohibit members from applying sales charges in excess of 8.5% of the public offering price on mutual fund purchases.



Formulas
  1. Sales Charge ($ amount)=Public Offering Price (POP, that which investors pay)-Net Asset Value (NAV)
  2. Sales Charge (%)=Dollar amount of sales charge/POP
  3. POP=NAV/100%-sales charge percentage

        1. Front-end Load - the sales charge which is deducted from the initial investment (A shares).
        2. Back-end Load (contingent deferred load) - the sales charge that is imposed upon withdrawal from the fund, assessed usually upon the lesser of the fund's redemption value or initial investment value. Many funds have back-end loads which decline over time (B shares).
        3. 12b-1 Plan - an additional fee of up to 1% on the fund's net asset value. It pays for advertising and marketing expenses.
        4. Administrative Expenses - these pay for the fund's operating expenses the fund's portfolio manager and employees. Depending upon whether the fund is actively or passively managed and its objective, the expense could be as low as five basis points or as high as three hundred. In practice, most actively managed funds range from one to two percent of assets under management.
        5. Mutual Fund Share Classes:
          1. Class A-contain a front-end load and a 12b-1 fee. There is no redemption fee.
          2. Class B-contain a redemption fee (back-end load, often declining) and the maximum 1% 12b-1 fee which is higher than that charged on a Class A fund. Once the deferred charge expires, conversion to Class A is allowed.
          3. Class C-a deferred sales charge will often be levied if the fund's shares are redeemed within one year of purchase. The fund also charges the maximum 12b-1 fee and does not allow share conversion to another class.
        6. Mutual Fund Distributions and Taxation-dividends and realized capital gains are taxable to the fund's shareholders even if they do not receive any income from the fund.
          1. Dividends-payable from the fund's net investment income (gross investment income-dividend and interest income-operating expenses; excludes advertising and sales expenses). Qualified dividends are taxable at a maximum rate of 15%.
          2. Capital Gains-appreciation of the value of the portfolio's securities.
            1. Long-term: securities must be held for more than a year. Gains are taxable at a maximum rate of 15%
            2. Short-term: securities are held less than a year. Gains are taxable as ordinary income.



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