If you are like most investors you have been exposed to the variety of Mutual Funds and their different classes. Do you understand them? Do you understand how they can affect your returns? Read more to learn about one of the Fund industry's big mysteries.
Most Mutual Funds offer multiple classes of shares. They all invest in the same underwriting fund but the expenses and commissions paid, referred to as “load”, are vary and can seriously affect the returns you realize. Most Mutual Funds offer three share classes which are typically referred to as A, B, and C share classes, and loads and fees vary per share class.
For typical longer term investors the Class “A” tend to be the best option if you can invest a lump sum into the fund. The Class “B” shares also target long-term investors and they can be cheaper than “A” shares, and usually convert to “A” shares after a fixed period of time. The Class “C” are usually best suited for the short-term investor and do not convert to any other class of shares.
Mutual Fund Loads
There are several types of contracts or “Loads” that can be charged on a Mutual Fund investment. There are upfront missions or “Front End Loads” that are paid when you buy. There are agreements that can be charged when you sell that are called “Back End Loads”. There are also commission charged annually, referred to as “12B-1 Fees” or “Trailing Commissions”. Each fund investment usually has a 12B-1 Fee and some combination of Front End or Back End Loaded commission and the structure of the contracts are all out in the prospectus. The breakdown varies per fund and can severely hamper your performance if you make the wrong choice.
Class “A” shares typically charge a “Front End Load” meaning that this commission is charged up front and reduces the amount of money invested in the fund. Fund Companies offer “Break Points” or reduced contracts as you invest (or pledge to invest) more money in the fund. There is usually no commission charged when you sell the fund as it was all paid up front.
Class “A” shares usually charge a 12B-1 Fee that is lower than the other classes, often.25% or less (referred to as 25 basis points). This amount is charged regardless of the amount of money you invest.
Class “B” shares charge a “Back End Load” where no commission is charged up front but is charged when you sell. This commission charged is usually reduced annually until it reaches zero and then the shares convert to Class “A” shares.
Class “B” shares also charge a higher 12B-1 Fee than the Class “A” counterparts, often.75% or higher (75 basis points). This amount is charged annually until the Class “B” shares convert to Class “B” shares when it adopts the lower 12B-1 rate.
Class “C” often charges a combination all three loads. They usually charge a reduced Front End Load when you buy shares and a reduced Back End Load when you sell shares. They also charge a higher 12B-1 Fee, some as high as 1.75 percent per year. The back-end load is often waived if you have owned them for a period of time. These shares typically do not convert to Class “A” shares.
Many of you have heard of “No Load Funds”, the largest of which is the Vanguard S & P 500 (VSPGX). These funds have no Front End or Back End Loads but can charge a 12B-1 fee of up to.25%. These funds are hugely popular with investors who do not use a Financial Advisor.
Regardless of the class of Mutual Fund you choose to invest in, you must consider the investment objectives of the fund in addition to the charges and expenses. Please conduct thorough due diligence before purchasing any fund.