A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Tuesday, March 01, 2005

How Does an A-Share Mutual Fund Work?

We'll call this Financial Basics.

An A-Share mutual fund (also known as a front-load mutual fund) is a term used to describe a mutual fund in which a percentage is taken from the money to be invested BEFORE the money is invested. Huh? Well, it works like this:

You have $10,000 to invest. You go to a brokerage firm like Merrill Lynch or someplace that is "full service." You give them the $10,000 to put in an A-Share mutual fund. The average front-load runs around 5.75%. So, $575 will be taken from your $10,000 investment and the remainder of $9,425 will go to work for you in the mutual fund. Now, each year the mutual fund will charge you management expenses which can range from .60% to 1.5% (some are higher, some are lower). Of this expense, .25% goes to the broker in the form of a trail.

Does this make load-funds bad? Not necessarily. There are some pretty reputable companies out there that charge loads. American Funds is one such company. Although they charge a front-load of 5.75% on their A share class, they manage to keep annual expenses low.

Next time I'll talk about different share classes and what they mean.