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Mutual Fund Sales Charges, Fees, and Expenses

Mutual Fund Sales Charges, Fees, and Expenses

With thousands of mutual funds to choose from, selecting the funds appropriate for your needs can be a challenge. Many investors choose to work with qualified financial advisors who can assist them in choosing funds to pursue their financial goals.

Before you begin making investment selections, you should review your situation. What is your investment goal? How long do you plan to keep your money invested? How comfortable are you with changes in the value of your investment over short and long periods? You should also familiarize yourself with the principles of asset allocation and diversification. And finally, before you invest in a mutual fund, carefully examine its performance, fees, and any sales charges.

Know the Costs

All funds have annual fees and expenses, which are used to compensate their professional managers and cover operating expenses. These fees may include a 12b-1 fee, which is collected to cover marketing and distribution costs and is periodically deducted from the fund’s earnings each year.

Some funds also apply a sales fee. These funds are known as “load” funds. The sales load, or fee, compensates the broker who helps you determine which fund is right for you (if you buy the fund from a broker or registered representative). If you are working with a fee-based financial advisor to select your investments, you may want to avoid buying shares that charge a front-end sales load unless the fund offers exceptional performance potential. When evaluating load funds, which charge either a front-end load (A shares), a back-end load (B shares), or a level load (C shares), consider your investment goals and time frame as they relate to how and when the fees are paid.

Glossary of Terms

Contingent-Deferred Sales Charge (CDSC) — a fee that may be charged when a shareholder sells fund shares.

12b-1 Distribution Fee — an annual asset-based sales charge that is used to pay for sales-related expenses.

Income Distribution — payments to shareholders resulting from interest or dividend income earned by a fund’s portfolio.

Service Fee — payments by a fund for personal service to investors and/or for maintenance of shareholder accounts by the distributor or a financial representative.

A Shares: The Front-End Load

Front-end loads are deducted from your initial investment, thereby reducing your immediate purchasing power. Investors in these shares are likely to have an extended time frame for their investment goals. These investors expect to remain in the fund for several years. If circumstances change, however, the shares can be redeemed at any time without additional charges.

One advantage of a front-end load is that it is based upon the fund’s net asset value at the time of purchase, and not on any appreciated value. In addition, some funds with front-end loads do not charge an annual 12b-1 fee. Investors should remember, however, that a front-end load could result in slower growth for your money than an investment in a level-load or back-end load fund.

B Shares: The Back-End Load

Back-end load funds typically charge what is known as a “contingent-deferred sales charge” if you sell your shares within 7 to 10 years of purchase. The sales charge may be collected on either the existing net asset value at the time you withdraw the funds or on the net asset value at the time of purchase, depending on the fund.

For many funds, the sales charge is reduced gradually over time, and after several years, no sales charge is collected. Of course, this declining fee schedule depends on the individual fund. Back-end load funds may be an appropriate choice for investors who intend to hold the investments for four to six years. But because these funds often charge a 12b-1 fee (as much as 1.00%), a fund with a lower 12b-1 fee may be a better choice for longer-term investors.

The advantages of a back-end load are that all of your money goes to work for you immediately, and if you hold the shares long enough, you will not pay a sales charge.

C Shares: The Level-Load Funds

Level-load funds may collect a sales charge based on the net asset value each year, and some may also include a small front-end or back-end load. They can also charge a 12b-1 fee. These somewhat higher costs may result in lower income per share than income earned on Class A shares. Therefore, these funds may be appropriate for an investor with an investment time frame of less than five years.

No-Load Funds

“No-load” funds do not charge sales fees but may incur 12b-1 fees. The maximum 12b-1 fee a no-load fund can charge is 0.25%.

Classifications of Shares
  Class A Class B Class C No-Load
Sales Charge Sales charge is an up-front fee, based on NAV at time of purchase. A contingent-deferred sales charge is collected when shares are redeemed, calculated as a percent of NAV declining to 0% after several years. The sales charge may be assessed on NAV existing at time of purchase or at time of redemption, depending on the fund. Annual charge, based on the NAV each year. None
12b-1 Fee May be charged May charge annually based on NAV. May charge annually based on NAV. May not charge more than 0.25% annually.
Investment Advice Provided Yes Yes Yes No
Sample Use Long-term investment Investment held 4 to 6 years; or longer if shares convert to Class A after that time. A short-term investment of 5 years or less. An investor who does not necessarily need the assistance of a broker or financial advisor in selecting

Which Type of Fund Is Right for You?

Because of their lower fees, no-load funds may seem most appealing at first glance. But before choosing these funds, consider your goals, your level of investment expertise, and how much time you can devote to making investment decisions. If you feel that you need assistance in selecting and investing in mutual funds, then load funds may be the more appropriate choice unless you are working with a fee-based financial planner. Before buying a fund that collects a sales charge, consider its performance record net of sales charges.

No matter what your decision, remember to evaluate your specific goals and personal investment style. With a long-term strategy, you’ll be more prepared to select the alternatives that can offer you the best value over time.

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