Do You Know Your ABC’s?

By: Investor Solutions

Not all mutual funds are created equal. With all the different classes of mutual funds out there, it’s no surprise investors are plagued with confusion when it comes time to invest their hard earned money. Some mutual fund companies offer various “shares” or “classes” of the same fund. Each class invests in the same investment portfolio with the same objectives and policies. However, what differentiates these asset classes from each other are the shareholder services, distribution arrangements, fees and expenses and, as a result, performance results.

What is the difference between A, B, C, X, Y and Z anyway?

Class A Shares

  • Charge a front-end load which can range from 4-5%. The amount of the frontend load reduces the amount of cash available for your investments. For example, if the front-end load is 4% and you have $50,000 to invest, $2,000 is going towards the front-end charge and only $48,000 is actually used to purchase shares.
  • Offer discounts or breakpoints on this front-end load depending on the number of shares being purchased.
  • Have 12b-1 fees (which are used to pay for the marketing and distribution of shares) that tend to be lower than those of other classes.

Class B Shares

  • Typically do not have a front-end load and, therefore, all of the available funds are used to purchase shares.
  • Instead, they have a contingent deferred sales load (CDSL) that investors pay when they redeem shares. This fee typically starts at about 5%.
  • Over time, the CDSL is typically reduced to zero.
  • Have 12b-1 fees greater than those for Class A shares are also charged.
  • Might automatically convert to a class of shares with lower 12b-1 fees if held by the investor long enough.
  • Receive no benefit for breakpoints as with Class A shares.

Class C Shares

  • Have no front-end loads.
  • Charge a CDSL that is generally lower than those of Class B shares. This fee is also reduced to zero if shares are held beyond the CDSL period (which for Class C shares tends to be 12 months).
  • Impose 12b-1 fees that are greater than for Class A shares and do not decrease over the lifetime of the investment.
  • Do not have breakpoints available.
  • Provide no conversion to Class A feature.

Class I Shares

  • Sold only to institutional investors.
  • Do not have front-end or deferred sales load.
  • Do not charge 12b-1 fees.
  • Have lower expense ratios.
  • Often available at lower investment minimums through a financial advisor.

The decision regarding which share class to purchase can depend on how much you want to invest and your investment time horizon. However, when choosing among different funds, the best option is “no load” mutual funds or those with no front-end or deferred sales charges. That doesn’t always mean you will be investing in institutional class funds. With some research, you can find Class A shares, for example, that do not charge frontend loads.

Before making any purchase, RESEARCH! The first thing you want to do when looking at different funds is to read the fund’s prospectus paying close attention to their discussion of different fund classes and their fees. You also want to make sure you have a firm grasp on breakpoints and when they occur. This will help you take full advantage of them. While keeping your assets and time horizon in mind, compare fees and expenses and calculate how these will affect your return. Remember to review your investments regularly so that you are aware of when CDSLs are reduced to zero or when Class B shares are to convert to Class A shares. Finally, communicate with your financial advisor. Ask him or her questions that arise during the course of your research. After all, you are the client and you want to know your ABCs.

By | 2018-11-29T16:17:58+00:00 September 28th, 2012|Blog|

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