AMFI Exam Tips series -9

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This chapter examines the various types of fees shareholders pay and contains the following topics

Types of Fees
Sales Loads
Front Load
12b-1 Fees
Level Load
Side Load Feature
Redemption Fee
Share Classes
Other Fees

There are two categories of fees which shareholders pay:

shareholder transaction fees operating expenses

Shareholder transaction fees are those costs which the investor pays directly. These include:

· Sales charges (loads)
· Purchase and redemption fees fees for special privileges.

Operating expenses are those costs that are paid by the fund, and therefore indirectly by all shareholders. These include:

· Management fees
· Distribution fees
· Other fees (i.e. transfer agent fees, legal fees etc.).

Note: Although expenses were covered previously under NAV, it is important to understand that they are actually a form of fee, paid by the shareholder.

There are several types of sales loads including:

Front load – paid when shares are purchased
Rear load – paid when shares are liquidated level load – a rear load fund with a level
compensation schedule.

Although there are a variety of no-load funds available in the market, there are still many investors who choose to buy load funds. Some reasons for this are that they:

· Invest (or commit to investing) enough money to qualify for significantly reduced sales
· Believe that load funds are more actively marketed by a sales force and will attract more
assets than equivalent no-load products, and therefore have lower expense ratioswish to
have their investments managed by a specific portfolio manager who works for an
investment advisor of a load fund.

The National Association of Securities Dealers (NASD) sets limits on the amount of commissions funds can charge to shareholders if the fund is to be distributed through NASD member firms.

A front load (also called front end load) is a sales commission investors pay at the time they purchase mutual fund shares. This load is expressed as a percentage of the amount invested.

As a result of the different fee structures applied to the different classes, shares in each class may have different NAVs, and usually receive different dividend rates even though they represent ownership of the same portfolio.

Capital gain distributions are always the same for all share classes of a fund.

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