As explained earlier, every mutual fund charges fees to cover expenses and transaction costs, etc. However, because the manner in which a fund charges fees can affect its price, it is important to be mindful of the different “share classes” of mutual funds. The major difference among them is when you pay the fees. Think of them like hotels, where you can be charged upon (or before) check in, or when you check out.
There is also a difference between Retail Funds and Institutional Funds.
A-Shares. When you buy “A” shares, you pay up front. The up-front fee is usually around 3.5–4.5% of the amount invested, depending on how much you invest. If you buy $100,000 in “A” shares, you’ll pay about $4,000 in up-front fees. As in virtually all other areas of commerce, the more money you spend, the greater the likelihood you’ll enjoy a discount on the fees. In industry parlance, this means that a broker might offer a reduced “front-end load” of 3.5% if you invest $200,000. The fee goes towards the broker and brokerage commissions.
In addition to the front-end load, there are “management fees.” These average 1.0–1.5% of assets managed, and are used to pay operating expenses and the fund manager.
Many “A” share funds also charge an annual 12b-1 fee (named for the section of the Investment Company Act of 1940) that covers marketing and distribution costs.
B-Shares. With “B” shares, there is no front-end fee at the time of deposit. Instead, these funds usually charge higher management fees (typically over 2%). They also charge a back-end fee. This means there’s free admission, but you have to pay to leave. The back-end fee is often discounted or eliminated after a certain period of time (the “surrender period”) to encourage investors to remain in the fund until that period expires, all the while paying the higher management fee.
C-Shares. “C” shares are like “B” shares in that there is no up-front fee and they charge similar management fees. That allows more of your money to grow (hopefully) from the start. But “C” shares generally charge a lower back-end fee of around 1%.
No-Load Funds. No-load funds don’t pay the financial advisor. Instead, the fund charges you, the investor, a fee. That makes them the most transparent of the funds. No need to hunt for commissions and hidden fees since it’s spelled out right up front.