Understanding Mutual Funds

Here are the forms of loads or fees that you are likely to be charged for open-end funds:

• Front-End Load: A load or charge that is paid to the sponsor or broker when purchasing the fund.
• Sales, Deferred or Back-End Loads:These charges are paid when selling an open-end fund. A straight-back end load is just deducted from the proceeds upon the sale of the fund. Some back-end loads are a function of the initial investment, which is then applied as a percentage of the sales proceeds. Contingent deferred sales charges (CDSC) will be calculated based upon the holding period of the investor. Furthermore, the CDSC will decline over time as the investor's holding period increases. For example, the CDSC may be 5% if sold within one year, 4% if sold after one year but before two years have elapsed, 3% if sold after two years but before three years have elapsed and so on.
• Exchange or Switching Fee: A fee paid to move assets from one open-end fund to another within a mutual fund family.
• Short Term Trading Fee: These come under various descriptions and are charged to investors if they fail to hold onto their fund shares for a minimum amount of time. This fee is designed to create a disincentive for short-term trading of mutual funds.
• Low Balance Fee: If your investment in a fund falls below a certain critical level, a fee or recurring charge may be assessed to you.
• Custodial Fees: These are levied for retirement accounts that have special operational and reporting requirements but vary from mutual fund to mutual fund.

How Are the Loads Applied to the Investment or Sale of Open-End Funds?

Buying and selling an open-end fund is not necessarily like buying or selling a stock, so let me provide some examples. Let's suppose that you plan to invest $10,000 in an open-end fund that has a NAV of $75 and a 1% sales load. You would pay $75.75 per share and receive 132.013 shares. Now suppose a few years later you sell the shares when the NAV is $150.00 and the sales load is 2%. You would receive $19,801.95 (132.013 shares times $150.00), less 2%, or $396.04, for net proceeds of $19,405.91.

If you buy a closed-end fund, you pay the trade price and add a commission. When you sell it, you sell at the trade price and receive the proceeds less a commission.

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