How Does an A-Share Mutual Fund Work?
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.