Mutual funds are among the dominant investment vehicles today. They are marketed to the public either directly by the fund underwriter, or indirectly through brokers. An underwriter possesses exclusive rights to distribute shares to investors, while brokers act on behalf of the underwriter. Direct- marketed funds are traded through various means of communication: Internet, over the phone, downtown offices, mail, etc. However, more than half of the mutual funds are sold through brokers and financial advisors who receive hefty commissions for executing the trade.
Prospectus
Every mutual fund has particular investment policies that are explicitly defined in the form of prospectus. A prospectus is a legal uniform disclosure, describing the key investment objectives, considerations and policies that will govern the asset management of the fund. The prospectus is annually updated to reflect the current economic condition and trends. It also addresses the risk and cost associated with trading the shares of stock within the fund. Mutual funds are not free investment tools. Running a mutual fund involves cost. Basically, there are three general classes of fees the fund is subject to: front- end load, back-end load, and 12b-1 charges.
Front-End Load
A front-end load is a broker commission or a sales charge the investor pay when buys shares. These charges rarely exceed 8.5% of the fund. A mutual fund is characterized as a low-load fund if it has loads that range up to 3% of invested funds, and as a no-load fund if it faces no front-end charges. Undoubtedly, no-load funds distributed directly by the mutual fund are the cheapest and usually the most profitable alternative, suitable for young investors who have a long-term investment horizon.
Back-End Load
A back-end load, also known as "contingent deferred sales charges", is a redemption charge incurred when you sell back your shares to the fund. In most cases, back-end load fee is below 6% as it decreases by 1 percent for every year you keep your money within the fund. Following the pattern, by the fourth year the redemption fee will fall to 3%.
12b-1 Charges
The Securities and Exchange Commission (SEC) allows mutual funds managers to use fund assets for both: distribution and shareholders service expenses. A 12b-1 plan is design to cover fund’s operating expenses, such as advisory fees to the investment manager, administrative and marketing expenses, the printing and mailing of prospectuses to investors, as well as shares presented for redemption. 12b-1 fees are usually expressed as a percentage of the total assets of the fund and range from 0.2% to 1%. 12b-1 charges are periodically deducted from the fund assets. The reduced portfolio value results in decreased shareholders’ equity.
Classification
Many funds offer securities rating within the portfolio. The cost structure of these mutual funds is based on shares classification. For example, Class A shares are subject to front-end loads, while Class B and Class C shares usually deploy a combination of back-end load and 12b-1 charges. Make sure you choose the combination of fees that best serves your investment goals and expectations.
Prospectus
Every mutual fund has particular investment policies that are explicitly defined in the form of prospectus. A prospectus is a legal uniform disclosure, describing the key investment objectives, considerations and policies that will govern the asset management of the fund. The prospectus is annually updated to reflect the current economic condition and trends. It also addresses the risk and cost associated with trading the shares of stock within the fund. Mutual funds are not free investment tools. Running a mutual fund involves cost. Basically, there are three general classes of fees the fund is subject to: front- end load, back-end load, and 12b-1 charges.
Front-End Load
A front-end load is a broker commission or a sales charge the investor pay when buys shares. These charges rarely exceed 8.5% of the fund. A mutual fund is characterized as a low-load fund if it has loads that range up to 3% of invested funds, and as a no-load fund if it faces no front-end charges. Undoubtedly, no-load funds distributed directly by the mutual fund are the cheapest and usually the most profitable alternative, suitable for young investors who have a long-term investment horizon.
Back-End Load
A back-end load, also known as "contingent deferred sales charges", is a redemption charge incurred when you sell back your shares to the fund. In most cases, back-end load fee is below 6% as it decreases by 1 percent for every year you keep your money within the fund. Following the pattern, by the fourth year the redemption fee will fall to 3%.
12b-1 Charges
The Securities and Exchange Commission (SEC) allows mutual funds managers to use fund assets for both: distribution and shareholders service expenses. A 12b-1 plan is design to cover fund’s operating expenses, such as advisory fees to the investment manager, administrative and marketing expenses, the printing and mailing of prospectuses to investors, as well as shares presented for redemption. 12b-1 fees are usually expressed as a percentage of the total assets of the fund and range from 0.2% to 1%. 12b-1 charges are periodically deducted from the fund assets. The reduced portfolio value results in decreased shareholders’ equity.
Classification
Many funds offer securities rating within the portfolio. The cost structure of these mutual funds is based on shares classification. For example, Class A shares are subject to front-end loads, while Class B and Class C shares usually deploy a combination of back-end load and 12b-1 charges. Make sure you choose the combination of fees that best serves your investment goals and expectations.
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