What is a Sales Charge?
How Does a Sales Charge Work?
In general, there are two kinds of sales charges: front-end loads and back-end loads. A is a fee paid to purchase an , and a is a fee paid to sell an (it may also be called a contingent deferred sales charge, an exit fee or a redemption charge). A no-load fund is a that does not charge any fees of this type.
Let's assume you are interested in making a $10,000 mutual fund. If the has a 4% , then of the $10,000 , $400 ($10,000 x .04) is a sales charge paid to the company, and $9,600 is actually invested in the as a result. Ideally, the earnings from the should more than make up for the . In this example, the must return 14.6% in one year to reach $11,000 in value.in the Company XYZ
If the sale of the . Again, the earnings from the should ideally more than make up for the . In this example, the must therefore return 14% in one year to reach $11,000 in value after the sales charge.instead has a 4% , then you must pay a $400 sales charge upon the
Clearly, the size of the sales charge affects the size of the investor's return. In our example, if the Company XYZ only a 10% return.is a no-load , then in order to reach $11,000 in value after one year, it needs to generate
Sales charges vary widely and may apply to reinvestments of dividends, interest or capital . mutual funds often are referred to as A Shares. When looking at mutual trading information, mutual funds have ask prices that are greater than the 's net asset value (or ). The ask price equals the 's net asset value plus the .
B Shares. Generally, are reduced for each year the investor holds the . If the investor holds the long enough, many companies waive the sales charge. For example, a might be 5% in the first year, 4% in the second year and so forth until the sales charge is zero.are commonly assessed on the beginning value of the , although some companies calculate the fee on the ending value if the share price is lower than the original purchase price. mutual funds are often referred to as
Frequently, investors are able to pay reduced sales charges if they make large breakpoint and varies from to . Some many have more than one breakpoint. In some cases, an investor can sign a letter of intent with the company, promising to invest a certain amount over time in order to qualify for the reduced sales charge from the outset.. The amount that qualifies for a reduced is called the
Why Does a Sales Charge Matter?
Sales charges discourage investors from frequently trading their, an activity that requires to have considerable amounts of on hand rather than invested. Generally, however, a sales charge is considered payment for the 's expertise in selecting the right . Notably, there is considerable controversy about whether perform better or worse than no-load .
Sales charges are most often associated with limited partnerships also may have them. must disclose loads and other fees in their prospectuses, and it is important to understand that a is only one of several types of fees that may be charged. Thus, when comparing , investors should be careful to evaluate all fees associated with an , not just the size of the sales charge. Additionally, the nature of the , the investor's risk tolerance and the investor's time horizon should always be considered when evaluating any ., but annuities, life insurance policies and