Charges & Expenses of Open-End mutual fund

Mutual funds are investment products, and it costs money to market these products to investors. To cover the costs of advertising and compensating salespeople some open-end mutual funds charge sales charges. Unlike the ongoing operating expenses we'll look at, a sales charge is a one-time deduction taken out of an investor's investment into the fund.

Sales charges cover distribution expenses: printing and mailing sales literature, advertising the fund through magazines, radio, TV, and the internet, compensating salespeople, etc.

If a mutual fund charges a maximum sales charge of 5.5%, that means when the investor cuts her check, 5.5% of it goes to the distributor and the broker-dealer who sold her the fund. Only the other 94.5% goes into the mutual fund for investment purposes.

So, if the net asset value (NAV) is $9.45 but the public offering price (POP) is $10.00, the extra 55 cents is the sales charge. How big is that sales charge? It is exactly 5.5% of the investor's $10 check.
The sales charge as a percentage = (POP - NAV) / POP

If we plug our numbers into that formula, we see that $10 minus $9.45 is 55 cents. 55 cents divided by the POP of $10 equals 5.5%. Another way to refer to POP is the gross amount invested. NAV can also be referred to as the net amount invested, what is left after the front-end sales charge is deducted.

The fund is made up of perhaps 500 different stocks and bonds, all trading through¬out the day. At the end of each day, the markets are open the fund recalculates the net asset value or NAV. Mutual funds use forward pricing, which means when a cus¬tomer puts in a purchase or redemption order at 10 AM, she won't know how many shares she'll buy or how many dollars she'll receive yet. Only when the NAV is next calculated are purchase and redemption orders processed.

If a mutual fund company were to allow certain large investors to see what the NAV is at about 4 p.m. Eastern and then receive the previous day's NAV, this is a violation known as late trading.

As the SEC website explains, "Late trading refers to the practice of placing orders to buy or redeem mutual fund shares after the time as of which a mutual fund has calculated its net asset value (NAV), usually as of the close of trading at 4:00 p.m. Eastern Time, but receiving the price based on the prior NAV already determined as of that day. Late trading violates the federal securities laws concerning the price at which mutual fund shares must be bought or redeemed and defrauds innocent investors in those mutual funds by giving to the late trader an advantage not available to other investors. In, the late trader obtains an advantage at the expense of the other shareholders of the mutual fund when he learns of market-moving information and is able to purchase or redeem mutual fund shares at prices set before the market moving information was released."

The NAV is the value of one share of the portfolio. The assets of the portfolio equal the value of the securities plus any cash they've generated, minus any liabilities. Where did the liabilities come from? The fund might borrow to handle redemptions because they don't always want to sell stocks and bonds to pay investors who are redeeming.

If the fund has $10,000,000 in assets and $550,000 in liabilities, the net assets of the fund are $9,450,000. If there are 1 million shares, the NAV per-share is $9.45.
Investors will receive $9.45 per share if they redeem their A-shares today, but they'll pay a POP higher than that if they're buying. Buyers of the B-shares will pay $9.45, but those redeeming/selling their shares will receive $9.45 per-share minus whatever percentage they leave behind to the contingent deferred sales charge.