By ERIC BAUM

Published: April 27, 2003

AS more investors reached their pain thresholds last year and cashed out their fund holdings, the amounts paid in exit fees to many top funds exceeded the amounts paid in entrance fees on other types of the funds’ shares.

»The movie is so bad more people are paying to get out than to get in,» said James Atkinson, principal of Orbis Marketing, a mutual fund consulting firm in Los Angeles.

The exit fees are paid on Class B shares of funds if they are sold within a certain period after purchase — generally, six years. The fees typically decline from 5 percent to zero over that time. Entrance fees are the front-end loads, or sales charges, that apply to a fund’s Class A shares; those fees also vary, but are typically about 5.5 percent, according to Morningstar Inc.

During the bull market of the 1990’s, Class B shares could look attractive. Buy, hold, watch the fund’s value surge and never pay a load, the theory went. But three consecutive years of declining stock prices have left many investors feeling that they have been dealt a one-two punch — having to endure market losses and then paying fees if they want to sell.

Patrick Baldasare is one such investor. Mr. Baldasare, the president of @Risk Inc. of Berwyn, Pa. which builds analytic systems for mutual fund companies, put $109,000 into Class B shares of the Putnam Health Sciences fund in December 1998 and sold the shares in September 2001. After he paid a redemption charge of $2,667, his proceeds were just $86,000.

»Finding myself in a heavy loss position and having to pay to get out of a bad situation was a classic case of adding more insult to injury,» Mr. Baldasare said.

As stock prices have tumbled over the last three years, investors have backed away from stock mutual funds. Those funds had just a trickle of inflows in 2001 and had outflows of $27.7 billion in 2002, according to the Investment Company Institute, the mutual fund trade group.

From 1997 to 1999, investors paid about $5 billion to get into the funds and $890 million to get out, according to the research company FundExpenses.com in New York. But from 2000 to 2002, fees to buy equity funds rose only to $6 billion, while fees to sell stock funds more than doubled, to $2 billion.

Last year, more was collected in exit fees than in entrance fees at 15 of the biggest 25 stock mutual funds with Class B shares, according to FundExpenses.com. Fidelity Investments, Merrill Lynch, Putnam Investments, John Hancock and Alliance Capital Management each managed at least one stock fund in which redemption fees exceeded upfront sales charges in 2002.

The Alliance Premier Growth fund, for example, collected $23.1 million of upfront fees and $2.5 million of redemption charges in 1998, according to FundExpenses.com. Last year through November, the fund — which lost 49.4 percent of its value in the two years through 2002, according to Morningstar — collected $12.7 million of redemption fees and only $3.8 million in upfront charges.

Thomas R. Westle, a partner at Spitzer & Feldman, a New York law firm that specializes in mutual fund issues, said he was not surprised that the intake from redemption fees had risen so markedly. »People were running, not walking, for the exits,» he added. »The commission that they didn’t pay up front is now being charged.»

To be sure, fee collection for some funds’ Class A shares has been falling for reasons beyond the market decline. Many investors now buy funds through retirement plans and mutual fund supermarkets without paying commissions.

Although the mutual fund industry has offered funds with exit fees for decades, they have become widespread as more funds have been offered with both Class A and B shares. Class B shares were conceived in 1988 by Merrill Lynch, which won permission from regulators to offer multiple share classes of a single fund. Other fund companies quickly copied the design, and within the next 12 years, Class B shares proliferated so that roughly 25 percent of funds with loads offered them, according to Morningstar.

But during those 12 years, the stock market did not have a sharp and prolonged market downturn. Only in the last three years have the effects of a bear market on Class B shares become evident.

When a fund sells Class B shares, fund distributors advance lump-sum commissions directly to brokers. To recoup the cost, the fund distributors charge investors higher annual fees than they do on Class A shares over the next eight years, after which Class B shares generally convert to Class A. Exit charges also recover the broker’s commission if investors leave the fund during the first six years.

»People who put money into B shares obviously expected to keep it there until they converted to A shares,» said Max Rottersman, president of FundExpenses.com. »The numbers show that many investors do not believe their funds will make good on their expected returns. My guess is those investors will probably not buy another sales-load fund for as long as they live.»

Financial planners often advise clients to avoid exit penalties by moving their investments into other funds within the same family. »I’d recommend if they’re looking for safety,» said Anthony Mattar, chief executive of the Mattar Financial Corporation, a financial planning firm in Southfield, Mich. »to diversify within the same family of funds to avoid a surrender charge.»

Some financial planners favor buying only no-load funds as a way to avoid the problem. But when a load fund is performing well — as many did in the 1990’s — investors often consider it worth buying.

THOUGH sellers of Class B shares may feel two-pronged pain — from watching their shares fall in value and then having to pay commissions — they may find some comfort in knowing that they may be faring better than others.

Mark Garbin, a partner at Constellation Financial Management in New York, which finances Class B share commissions for fund distributors, said, »It’s quite conceivable that a similar A share could have been worse.»

Consider an investor who paid $10,000 for Class A shares of the Davis New York Venture fund on March 31, 2001, and held them for two years. After adjusting for his initial sales charge of 4.75 percent, annual fees and market losses over that time, he would have been left with $7,348 on March 31 this year, according to the InvestmentView software of Thomson Financial.

But an investor who bought Class B shares of the fund on March 31, 2001, and sold them two years later paid a 2 percent redemption fee, or $221, on a balance that was also diminished by market losses. The investor in the Class B shares, after paying higher annual fees, was left with $7,370, but still $22 more than the investor in the Class A shares.

Still, Brian Portnoy, a senior fund analyst at Morningstar, doubted that investors who sold Class B shares at a loss would find comfort in the comparison. »That’s like having a lower income so you pay fewer taxes,» he said.

Photo: For Patrick Baldasare, paying a redemption fee on top of his loss in a Putnam fund was »adding more insult to injury.» (Tim Shaffer for The New York Times)