As we have just discussed the effect of sub-prime mess on the open-end funds (please also refer to this article for the basics of open-end and closed-end funds). Let’s not stop and summarize the important differences and terminologies you must know for the CFA exams.

Loads – In an open-end fund, when a share is created or redeemed, the portfolio manager may charge you purchase fee (a front-end load) or redemption fee (a back-end load).

No-load funds – If there are no fees being charged during the purchase or the redemption of an open-end fund, this is called No-load funds.

*** Remember, for closed-end funds, the manager sells share at a premium to the underlying assets as the issuance costs. And when you sell the share in the open market, you only have to pay commission fee. Therefore, “load” and “no-load” are not applicable to closed-end funds!

12b-1 fees – You must remember that management fees, administrative fees and distribution fees are 12b-1 fees in US (it appears quite often in the exams!).

One-time fees – referring to Loads and premium. You pay only one time for a share.

Annual Fees – usually 12b-1 fees are annual fees because you pay every year.

For example, an open-end fund charges 1% of investment as front-end load, 2% as back-end load. Its management fee is 0.5% and the growth rate is 8%. How much does $1000 initial investment worth at redemption after 3 years?

Redemption value = $1000 x (1.08)³ x (1-0.01) x (1-0.02) x (1-0.005)³ = $1203.9