Mutual funds come in several different share classes A, B, C and no load.
A Shares- This class has a front end sales load which is how you pay for the services of the Broker/Dealer Rep. the fund takes a percentage of your investment off the top, leaving you with the rest invested. Industry norms for A Share front end sales loads range from 2 to 5% depending on the company, the Broker, and the size of the investment. The fund company then also charges an ‘expense ratio’ on every dollar, usually on a monthly basis, but some on a daily basis. Common expense ratios for sales load funds range from .40% to as high a 1.8%.
B Shares- These have been discouraged for a long time and few broker dealers will recommend them. The have no sales charge off the top like A shares, but have higher expense ratios than A shares and have a back-end surrender charge. This Contingent deferred surrender charge (CDSC) usually lasts for 5 to 7 years and applies to the entire fund value. So if your fund grows by say 10% then the expenses ratio is assessed against the higher value and if you cash in, the CDSC is assessed against the total fund. These, pay a commission like the A shares based on the total amount of the investment.
C Shares- This is the closest to a fee based fund with a few differences that favor the mutual fund company and the broker/dealer.They usually have a 1.5% to 1.95% toatl commission. They usually have a six to twelve month CDSC of 1% like the B shares. Of the total expense ration, 1% goes to the broker and is in place for as long as your money is invested. One main difference between this type of fund and a fee based managed account is that the expense ration comes off the top rather than off the bottom as with the fee based accounts. This difference is subtle but can create “drag’ on the performance of the fund.
No-Load funds Undisputedly the lowest cost of all the funds, generally speaking. The down side here is that you must manage and choose on your own or hire a fee based advisor to help choose and manage for you. Some name brand funds have expense rations of as low as .05% and some as high a 1.25% depending on the fund, the degree of management, the risk and many other factors.
The new kid is Exchange Traded Funds (ETF) That trade like a stock but are diversified like a mutual fund. The expense ratios are very low and can be traded during the day.