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Cents and Sensibility Guy Steele |
Understanding fund classes
not as easy as A, B, CBefore you buy a mutual fund, you'll want to do some research. What is the fund's investment philosophy? Who manages it? How diversified are its holdings?
Then, after you've done your homework, you'll have to use it for the right class. Specifically, you may need to choose which type -- or class -- of mutual fund share you want to buy.
The most common classes are A, B and C. Let's take a look at all three:
Class A shares
When you buy Class A shares, you will pay an upfront sales charge, taken out of your initial investment. These sales charges (or "loads") usually range from 3 percent to 6 percent.So, for example, if you pay $10,000 for a mutual fund that has a 5 percent load, $500 of your money will go for the sales charge, with $9,500 used to buy shares.
Class A shares also may impose a "12b-1 fee" to cover marketing and distribution expenses. These 12b-1 fees are fairly low -- about 0.25 percent annually. Class A shares traditionally have the lowest ongoing expenses of any class.
Class B shares
If you purchase Class B shares, you don't pay a sales charge right away.Instead, you'll pay a "back-end load" when you sell your shares.
Typically, this back-end load decreases over time; for most Class B shares, the load disappears after about six or seven years.
Class B shares often charge a higher 12b-1 fee -- as much as 1 percent per year.
However, Class B shares often convert to Class A shares over time, so you would then start paying the lower 12b-1 fee.
Class C shares
Generally, Class C shares do not charge either front-end or back-end loads if held for more that one year. But if you buy Class C shares, you may pay a 1 percent 12b-1 fee for as long as you own the fund. Class C shares may not convert to Class A shares, so these continually high 12b-1 fees can make Class C shares expensive if you plan on holding them for many years.
Making choices
Which of these share classes is right for you? The answer depends somewhat on your individual situation. If you plan to hold a mutual fund for many years, then you might be best served purchasing Class A shares.How about Class B shares? After all, the vanishing sales load can be an attractive feature -- if you are sure that you will hold your fund long enough to benefit from it. If you sell your shares early, you will have to deal with the back-end charge. Plus, not all Class B shares convert to Class A, so you could be stuck with high 12b-1 fees, as well.
As for Class C shares, we've already mentioned a potential drawback -- the inability to convert to Class A shares with lower 12b-1 fees. Still, if you think you may only invest in a particular mutual fund for a few years, you might benefit from Class Cs lack of front-end or back-end sales charges. Be careful, though -- some Class C shares do carry these charges.
Clearly, you need to be sure of what your share class options are before you invest in a mutual fund. If you are investing in stock mutual funds, they are subject to market risks, including the potential loss of principal invested. Ask your investment representative which mutual funds are right for you and carefully read the prospectus, which should provide complete information, including fees, about any fund. But you also must focus on how a fund can fit into a diversified portfolio, based on your goals, risk tolerance and time horizon. If a fund isn't right for you, then it's not a bargain -- no matter what it costs.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688
