Sales Charges (Loads)

Now that you understand the different types of investment companies, let's look at how mutual funds charge investors for the cost of distribution: the sales charge structure.

Share Class Overview

Mutual funds offer different share classes, each with a different fee structure. The three main classes are A, B, and C.

Class A Shares (Front-End Load)

Think of it this way: Share classes are like different payment plans for the same product. Class A is "pay upfront and save later." Class B is "pay nothing now but pay when you leave." Class C is "pay a little extra every month."

• Sales charge paid at the time of purchase; deducted from the investment amount
• Maximum front-end load: 8.5% of the public offering price (POP)
• Lower ongoing expenses (lower 12b-1 fees, typically up to 0.25%)
• Eligible for breakpoint discounts (volume discounts on larger investments)
• Best for larger investments and long-term investors

To charge the maximum 8.5%, the fund must offer all three:

1. Breakpoints (volume discounts)
2. Rights of accumulation
3. Dividend reinvestment at net asset value (NAV)

Example: You invest $10,000 in a Class A fund with a 5% front-end load:

• Sales charge = $10,000 x 5% = $500
• Amount actually invested = $9,500

Exam Tip: Gotchas

• The 8.5% maximum load applies to POP, not to NAV.
• The front-end load reduces the amount invested; it comes out of your investment, not added on top.

Class B Shares (Back-End Load / CDSC)

• No front-end sales charge; the full investment goes to work immediately
• Contingent Deferred Sales Charge (CDSC) charged when shares are redeemed
• CDSC typically declines over time (e.g., 5% in year 1, 4% in year 2, down to 0% after 6-8 years)
• Higher 12b-1 fees than Class A (up to 1%)
• Often convert to Class A shares after the CDSC schedule expires
• No breakpoint discounts available
• No longer widely offered (many fund companies have eliminated them)

Exam Tip: Gotchas

• Class B shares are mostly eliminated, but they still appear on the exam. Know the declining CDSC schedule and the conversion to Class A.

Class C Shares (Level Load)

• No front-end load and no significant back-end load (small CDSC of about 1% in the first year only)
• Higher ongoing 12b-1 fees (up to 1% annually)
• Never convert to Class A shares
• No breakpoint discounts available
• Best for short-term investors (holding period of 1-3 years)
• Expensive for long-term investors due to the persistent higher 12b-1 fee

Exam Tip: Gotchas

• Class C shares become the most expensive option over time because their higher 12b-1 fees never go away.

No-Load Funds

• No front-end or back-end sales charges
• May still charge 12b-1 fees up to 0.25% and still be called "no-load"
• Sold directly by the fund company (no broker compensation through sales charges)

Exam Tip: Gotchas

• "No-load" does not mean "no fees." A no-load fund can still charge 12b-1 fees up to 0.25%.

Share Class Comparison

Exam Tip: Gotchas

• Only Class A shares offer breakpoint discounts. If the exam describes an investor making a large lump-sum investment for long-term holding, Class A is almost always the most suitable recommendation.