Technically known as an "open-end company," a mutual fund is an investment company that pools money from many investors and invests it based on specific investment goals. The mutual fund raises money by selling its own shares to investors. The money is used to purchase a portfolio of stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Each share represents an ownership slice of the fund and gives the investor a proportional right, based on the number of shares he or she owns, to income and capital gains that the fund generates from its investments.
The particular investments a fund makes are determined by its objectives and, in the case of an actively managed fund, by the investment style and skill of the fund's professional manager or managers. The holdings of the mutual fund are known as its underlying investments. Both the principal value and return of, those investments will fluctuate.
Class A shares have a front-end load, which is a commission you pay at the time you buy the shares. The average range is between 2 percent and 5 percent, though it varies. This amount is subtracted from the total you're investing in the fund. For example, if you invest $1,000 in a fund with a 5 percent front-end load, $950 of your investment would buy fund shares, and $50 would go to your broker.
Class B shares have a back-end load, which you don't pay unless you sell your shares during the period the charge applies, which is usually up to seven years after purchase, though it could be longer or shorter. The load tends to drop, perhaps by a percentage point each year, and then disappears altogether. However, the annual distribution fees that the fund charges on Class B shares are higher than the fees on Class A shares. Back-end loads are also known as contingent deferred sales charges (CDSC).
Class C shares may carry a level load, which a fund collects every year you hold the fund, or they may have a front-end load such as in Class A shares or a back-end load or CDSC, similar to B shares. Class C shares also tend to have higher annual distribution fees than Class A shares, typically on a par with those that apply to Class B shares. In addition, C shares do not convert to another share class.