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How Does a Share Sales Charge Work?

Original post by Ciaran John of Demand Media

When you purchase shares of a mutual fund, you become a part owner of an investment portfolio that contains various different securities and instruments. Some fund companies impose a sales charge called a load, and this fee covers the cost of paying commission to the brokers who sell the fund. Some funds assess a fee at the time of purchase while others require you to pay the fee when you sell your shares. Although many so-called "no load fund" mutual funds do not impose a sales charges, you still may have to pay a fee or fees.

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Front Load

Mutual fund companies sell different classes of shares within the same fund. Front load shares have an upfront sales charge and mutual fund companies refer to these as A-class shares. The Financial Industry Regulatory Authority (FINRA) caps upfront sales charges to 8.5 percent. This means that you could pay a commission of up to $850, on a $10,000, share purchase, for example. Many funds charge fees well below the maximum, and FINRA limits the fees further if the fund company charges shareholders other types of fees. When you buy a significant number of shares within a 13 month period, you may reach breakpoints at which you receive a discount on the sales charge. In some instances, you can avoid the sales charge altogether if you invest $1 million or more in a particular fund.

Contingent Deferred Sales Charge

Class B shares are a type of share for which you pay a contingent deferred sales charge (CDSC) at the time of share redemption. You pay nothing when you buy your shares, so your entire investment goes toward buying shares. The CDSC decreases over time and you pay no back-end load or sales fee if you hold onto your shares for seven years. However, you do pay annual operating fees, and these fees are much higher than the ones for A-shares. These fees mean that B-shares become more expensive than A-shares over the course of time, so fund companies usually convert B-shares to A-shares after seven years or more.

C Shares

When you buy class C shares, you do not pay a front-end sales load. You can avoid paying a back-end sales load if you hold onto the shares for at least 12 months. However, many fund companies assess a 1 percent redemption fee if you sell your shares within 12 months of purchase. However, C class shares have higher annual operating costs than A or B shares. This means that, despite the lack of a sales charge, C shares often become more expensive than other share classes for long-term investors.

Considerations

Many investors attempt to reduce costs by investing in no-load funds. While these funds do not charge actual sales loads, nothing prevents a fund from charging other fees, such as a purchase or redemption fee. Technically, purchase and redemption fees are not classified as so-called loads because the fees are paid to the fund company and do not cover broker's commissions. Furthermore, the operating costs of these funds often exceed the costs of load funds. Carefully review the investment prospectus to find out about all of the costs involved before investing in a particular fund.


                   

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About the Author

Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer." He holds a Florida Life, Health and Variable Annuity license as well as series 6 and 63 securities licenses. He has a Bachelor of Arts in theology from Kings College in London.


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