Quick Answer
The expense ratio captures ongoing costs but never sales loads. Class A charges a front-end load, Class B a declining back-end charge, Class C level fees forever. Fund capital gains distributions are long-term regardless of your holding period, and real estate investment trust (REIT) payouts are ordinary income.
The whole unit on one sheet: fees and loads, the share classes, fund taxation, REITs, and how to evaluate a fund.
The One-Liners That Win Points
- Public offering price (POP) = net asset value (NAV) + front-end sales charge. Sales charge percentage is figured on POP, not NAV.
- Expense ratio = annual operating expenses / average net assets. It includes management fees, 12b-1 fees, and administrative costs, but NOT sales loads or brokerage commissions.
- 12b-1 fees cover distribution and marketing; they reduce NAV over time and must be approved by the board, including a majority of independent directors.
- A fund can call itself "no-load" and still charge a 12b-1 fee, as long as that fee stays at or below 0.25%.
- Management (advisory) fee is typically the largest single ongoing expense.
- Capital gains distributions are always taxed long-term, set by how long the FUND held the securities, not how long you held the shares.
- Contingent Deferred Sales Charge (CDSC) is the Class B back-end load that declines each year to zero.
- A breakpoint sale (steering a client just below a discount threshold) is a regulatory violation.
- Fund exchanges within the same family are taxable even though no cash leaves the family.
Numbers to Lock In
| Item | Value |
|---|---|
| Maximum Class A front-end load | 8.5% of POP |
| To charge the full 8.5% load, fund must offer | breakpoints, rights of accumulation, dividend reinvestment at NAV |
| Class A 12b-1 fee (low) | up to 0.25% |
| Class B / Class C 12b-1 fee (high) | up to 1.00% |
| "No-load" 12b-1 ceiling | 0.25% |
| Total maximum 12b-1 fee | 1.00% (0.75% distribution + 0.25% service) |
| Class C small back-end load | 1% if redeemed within year 1 |
| Letter of intent (LOI) forward period | 13 months (can backdate 90 days) |
| Rights of accumulation (ROA) time limit | none (lifetime) |
| REIT distribution requirement | 90% of taxable income annually |
| REIT qualification shorthand | 75/75/90 (assets, income, distribution) |
| Open-end fund redemption | within 7 calendar days |
| NAV pricing | once daily after 4:00 PM Eastern (forward pricing) |
| Hedge fund fees | "2 and 20" (2% management, 20% performance) |
Top Gotchas
- Class A vs. B vs. C: Class A suits large, long-term investors (front-end load, lowest ongoing fees, breakpoints). Class B was for buyers who wanted the full amount invested up front (declining CDSC, higher 12b-1, often converts to A); most fund companies discontinued it. Class C suits short holds of one to three years (no front-end load, small one-year CDSC, higher perpetual fees, NEVER converts to A) and is most expensive long-term.
- REIT distributions are ordinary income, NOT capital gains. Despite being called "dividends," they miss the preferential qualified-dividend rate because they pass through rental income.
- Buying just before a distribution creates a phantom tax liability: NAV drops by the distribution amount, so there is no economic gain, yet tax is owed.
- Sales charge is figured on POP, not NAV. Working from NAV yields the wrong percentage.
- Closed-end funds have no creation/redemption mechanism and can trade at persistent premiums or discounts; ETF arbitrage via authorized participants keeps ETFs near NAV.
- A "lock-up period" signals a private fund, never a mutual fund, which must redeem within seven days.
- Match the benchmark to the fund's asset class and style, and check manager tenure before trusting a track record.
One-Breath Recap
The expense ratio captures ongoing costs (management, 12b-1, admin) but never sales loads, and the sales charge is figured on the public offering price, not net asset value. Class A charges a front-end load for large, long-term investors, Class B a declining back-end charge that often converts to A, and Class C level fees forever for short holds. Fund capital gains distributions are long-term based on the fund's holding period, real estate investment trust payouts are ordinary income under the 75/75/90 rules, and fund exchanges within a family are taxable. Match the benchmark to the fund's style, check manager tenure, and this two-question unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Pooled Investment Characteristics unit for the complete lesson.