In our regular Investor Glossary series, we give you the low down on the most common words and phrases in our industry that could cause you to scratch your head.
Last time out we examined some of the fees associated with mutual funds.
Today we'll delve deeper into what we opened up in that piece, with a look at the various forms of load fee, front-end, back-end, no-load, and low or level loads.
Applicable to class-A shares, this fee is charged as a commission when an investment is initially made, therefore at the 'front-end' of the purchase. The amount is subtracted from the sum at the outset, therefore it reduces the value of the investment from that point. For this reason, such fees can sometimes be seen as a cost for financial expertise in selecting the best fund options.
Logically enough, this fee is applied at the sale stage of an investment, and can also be referred to as a 'deferred sales charge'. It is charged to class-B shares. The period after which the shares will be sold is specified at the beginning of the investment, and the fee to be applied - a percentage of the share value - decreases on a yearly basis. The rate of decrease is also defined at the start of the investment and can fall to zero if the investor maintains their holding over enough time.
A level or low load fee evens out the payment schedule to the investment intermediary and is charged annually, for as long as the shares are held. They differ from front and back-end loads in this sense, as they are calculated as a fixed percentage of the investment's average net assets and counts as an expense of operating the fund. These charges can also be referred to as 12b-1 fees and are applied to class-C shares. As the level load percentage is based on the fund's net asset value, it can become more expensive when the fund increases significantly, even though the percentage charge remains fixed.
Some funds simply charge no form of load fees to a fund, although there are nonetheless many other forms of fee and commission that could be applicable. We looked at some of these alternative fees in the last edition. No-load funds relate to class-C shares.
Are there any investment terms that drive you dizzy with confusion? Let us know in the comments - or like our page and comment over on Facebook with your pet peeve - and we'll be happy to help!