What's the Difference Between Back-End Loads and Redemptions?

Beverly,

It seems to me that both "no-load" funds and load funds have added significant loads to short-term trades to prohibit short-term trading. However, it was done in reaction to the market-timing activities in the news. If an investor leaves Putnam or Janus and goes into a "no-load," how do they know they are not going from the frying pan and into the fire? An investor could end up paying another fee even with a "no-load" fund if they redeem, too.

Thank you,

Paul F.

Let's clear up a few issues regarding load and redemption fees. Loads are sales charges -- like commissions, they are essentially the fee that you pay for the privilege of purchasing a fund through a broker. If you invest $10,000 in a fund with a 2% load, you've paid $200 to the broker and actually invested $9,800. No-load funds don't charge any additional fees -- if you invest $10,000 in a fund, that's the amount that goes into the market. You can generally buy no-load funds directly from the investment company or through a broker.

Of the increasing number of funds that are charging loads, there are a variety of fee structures. Different share classes come with different loads, although there's no hard-and-fast rule as to how share classes are structured. Indeed, the options offered by many fund companies are unique and difficult to decipher.

Generally speaking, though, Class A fund shares carry an initial sales charge -- what's known as a front-end load. Discounts on front-end loads are available for large purchases of Class A shares -- the so-called breakpoint.

Class B shares do not have an upfront sales charge. Rather, they become subject to a "contingent deferred sales charge" (or "back-end" load) only if they are redeemed before the end of a specified holding period -- the load diminishes over time, and usually disappears after you've held a fund for five years. And because we wouldn't want fund executives being paid like, say, teachers, Class B shares mitigate this diminishing sales charge by increasing the 12b-1 fees. (The higher 12b-1 fees on Class B shares is ostensibly to defray the costs of distribution of the fund.)