Mutual Fund Trading, Pricing and Fees

In this second lesson, we will cover how to BUY and SELL mutual funds, how the price of a mutual fund is determined and explain various types of trading fees.

Trading Mutual Funds

You can invest in mutual funds in a variety of different ways. In the US, many people invest through a retirement plan, such as a:

• 401k plan
• Individual Retirement Account

Mutual funds can also be bought through:

• a brokerage firm
• a bank
• the fund directly

You can enter an order to BUR or SELL a mutual fund anytime the New York Stock Exchange is open.

Mutual Fund Pricing

Trades in mutual funds are priced at the end of the day. They are priced once daily, after the Stock Market closes. Mutual fund shares are created only at the end of the day due to the way their prices are determined. After the market closes, the mutual fund company calculates the net asset value – or NAV – of each fund they offer. The net asset value is based on the value of ALL the assets, meaning the cash + the securities, in each mutual fund minus any
liabilities DIVIDED BY the number of outstanding shares.

Here’s an example:

ABC mutual fund has $50 million in assets and $10 million in liabilities, so its total value is $40 million. This fund has 4 million shares outstanding. Dividing the fund’s $40 million in assets by the 4 million shares outstanding provides the price per share of $10.

Mutual Fund Fees

The costs and fees of different types of mutual funds vary broadly, and there are several different ways fees may be incurred. Investors are always encouraged to read each fund’s prospectus very carefully and consult with their professional advisor to determine which funds are most appropriate for their specific needs.

Here are some of the more common types of mutual fund fees.

Front-End Load

When investing in Class A shares there is typically a purchase fee or “front-end load”, which means you'll pay a percentage of your purchase amount every time you buy shares. However, purchases made by a Professional Advisor may be exempt from those fees.

Front-end loads typically range between 3 percent and 5 percent but can be higher.

Here’s an example of a front-end load:

If you buy $10,000 worth of shares of an A share mutual fund that has a 5 percent front-end load, you will pay a $500 fee to purchase those shares, which will come out of your total investment. That means your investment in shares of a fund will be $9,500 instead of $10,000.

Back-End Load

When you purchase Class C Shares there is typically a fee called a “back-end-load”. This fee is also referred to as a “contingent deferred sales charge” or CDSC. Here you don’t pay ANY fees when you BUY shares, but when you sell shares prior to a time period specified in the fund’s prospectus, you will pay a percentage of the dollar value of your
redemption, based on the number of years that you held your fund position. The period is typically 1 to 3 years. If you hold the shares until after the period specified, you won’t have to pay the back-end load.

If you bought shares in your fund on different days, most funds will calculate your CDSC fee using the first-in-first-out method. That means the first shares purchased will be the first ones sold.

Short Term Redemption Fees

Funds that want to discourage short term trading, which is often disadvantageous to the fund’s investors, impose Short Term Redemption fees. These are often referred to by their acronym which is S T R fees. This fee is typically imposed for redemptions occurring within 7 days to 6 months of the original purchase.

No-Load and No Transaction Fee Funds

Do-it-yourself investors can avoid paying sales charges by purchasing No-Load Funds or avoid transaction charges by purchasing No Transaction Fee mutual funds.

No-Load Funds

With a No-Load Fund, NO FEE is directly charged by the fund when shares are purchased or redeemed. Note that sometimes the investor’s broker or advisor may charge a transaction fee.

No Transaction Fee

There are also No Transaction Fee funds or NTFs. That means there are NO FEES charged by the broker or advisor for each of the investor’s trades. But keep in mind there can be Front-End-Load, STR, or Back-End-Load fees charged by the fund for each purchase or redemption.

12b-1 Fees

12b-1 fees may be charged by your investment professional as compensation for the expenses they incur in marketing and servicing your fund investment.

Management Fees

Finally, all funds charge a management fee, and that fee reduces the fund’s overall earnings. The management fee must be disclosed in each fund’s prospectus. It’s also essential to remember that investments have risks, and you can lose your principal.