Share Classes

What's another way to classify different types of mutual funds? By looking at sales charges - specifically, whether or not there is a sales charge paid to a financial adviser as a result of the investment. If there is no such charge, the fund is known as a no-load fund.

For funds with a sales load, there are typically several classes of shares, each with a different set of sales charges and other expenses:

  • "A" shares
    • These have "front-end" loads and are sold at the public offering price (POP),which consists of the net asset value (NAV) of the fund plus the sales charge.

    • This charge is calculated by subtracting the NAV from the POP, and then dividing that number by the POP.

    • As an example, if the fund has an NAV of $20 per share and a POP of $21.50 a share, the sales charge is $1.50 divided by $21.50, which equals a 6.9% sales charge.

    • Breakpoints are discounts available to those who invest large amounts within a single mutual fund family. They apply to "A" shares only.

      • Typically, the amount of the discount increases as the amount invested increases.

      • The large amount does not have to be invested all at one time; an investor can take advantage of breakpoint discounts by signing a letter of intent stating that the investor will reach the breakpoint level within 13 months of the initial investment.

      • Another option is the right of accumulation (ROA), which allows the investor to use amounts invested in the past to calculate the breakpoint discount.

  • "B" shares
    • Are referred to as "back-end" load funds
    • In essence, the investor purchases the funds at NAV, but the financial adviser is paid a commission as if the investor paid a front-end load.
    • If the investor sells the fund within a set number of years (typically five to eight years), then a sales charge is applied.
    • This is known as a contingent-deferred sales charge.

  • "C" shares
    • Known as "level-load" funds, for which investors pay an annual asset-based fee
    • There is usually a 1% or 2% back-end load if the investor withdraws money from the fund during the first year.
    • After the first year, no additional sales charges apply.

Sales Charges and Expenses

  • 12b-1 fees
    • The annual fee for marketing fund shares, which is permitted by the SEC but must be approved and adopted by the shareholders
    • While this amount was traditionally quite small (typically about 0.25% in "A" shares and no-load funds), mutual fund families use a larger fee (typically about 1% of the NAV) when offering "B" and "C" shares.
    • So while advisers may tout such shares as being similar to no-load funds, in fact, there is a higher cost to own the funds each year.

  • Management Expense Ratio (MER)
    • The cost of managing the mutual fund
    • Independent of the sales charge on the fund (if any), the expense ratio includes all costs to operate the fund, including:
      • investment advisery fees
      • rent and utilities
      • salaries
      • shareholder services

The expense ratio is deducted from the income of the fund and is expressed as a percentage of the NAV. The amount must be disclosed in the prospectus.


Look Out!
You can expect several questions about fund expenses, including 12b-1 fees. Remember that 12b-1 fees are not part of the expense ratio.



Exam Tips and Tricks
Here is a sample exam question about 12b-1 fees:

  1. In order for a mutual fund to utilize a 12b-1 fee, the plan must be approved by the:
    1. SEC
    2. FINRA
    3. Mutual fund family
    4. Shareholders of the fund

The correct answer is "d". The shareholders must agree to adopt the 12b-1 fee. These fees are permitted by the SEC, but not approved by them.



Introduction

Related Articles
  1. Financial Advisor

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  2. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  3. Investing

    The ABCs Of Mutual Fund Classes

    Do you understand how the various types of shares differ? We give you the pros and cons of each.
  4. Investing

    The Lowdown On No-Load Mutual Funds

    These funds let you cut out the middleman - and the fees.
  5. Investing

    What's a No-Load Fund?

    A no-load fund is a type of mutual fund that does not charge a front-end, back-end or level sales charge.
  6. Investing

    Mutual Fund Fees: Here's What You're Paying For

    It is important to understand mutual funds fees so that you know what you are paying and to whom, and how that impacts your portfolio returns.
  7. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  8. Financial Advisor

    What is a 12b-1 Fee?

    Mutual funds typically charge between .25% and 1% in 12b-1 fees for marketing, distribution and administration expenses.
  9. Investing

    ETFs vs. Mutual Funds: The Lowdown on Costs

    Confused about the full range of fees on ETF and mutual funds? Here's a quick guide on fees and expenses.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center