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Tuesday, September 2, 2008

How Do Mutual Funds Work The Loads

From The Hoss's Mouth


How do mutual funds work? In today's post Hoss Cents Free Financial Money Magazine will answer that very question, in particular, with regard to their load charges: front-end, back-end and no-load funds. MER (management expense ratio) will be detailed in the next posting of Hoss Cents.

Funds have two types of charges. Those that you see and those that you don't see. Load charges are the obvious costs that you see. Management fees are those costs that you don't see, but they are taken into account and reported as the management expense ratio (MER). Both have an impact on your funds' bottom line performance.

How Do Mutual Funds Work: "Front-End Loads":

When you purchase a front-end load mutual fund, you agree to pay a certain percentage of your total investment as the sales charge, also known as the commission. If you have $10,000 to invest and agree on a 3% commission, then the total that is actually invested in the mutual fund is (10,000 - 300) = $9,700. Every dollar you pay in commission has a negative effect on your bottom line. The Hoss suggests that you shop around before purchasing a front-end load mutual fund. Front-end load mutual funds do not charge a redemption fee, but they may charge a close out or switching fee.

How Do Mutual Funds Work: "Back-End Loads":

Also known as deferred sales charges (DSCs). A back-end load mutual fund sales charge is applied only when you redeem the fund. The percent charged is on a sliding scale that reduces by a prescribed amount each year over a specified time frame. For example, the payment may be 5% if you redeem after one year, and reduced down to zero % if you redeem after seven years. While these back-end mutual funds have the advantage of having all your money go to work for you, watch out for those funds that impose a distribution fee, or charge a higher management fee for back-end load mutual funds.

How Do Mutual Funds Work: "No-Load Mutual Funds":

The Hoss buys only no-load mutual funds. The no sales charges on purchases or upon redemption is just to big an advantage to pass up. However, before purchasing any mutual fund, The Hoss evaluates the mutual fund's performance, management expense ratio and any hidden fees associated with the fund. All of this information can be found in the Prospectus of the mutual fund you have selected.

Stay on track,
The Hoss


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