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Mutual fund alphabet soup? That's
a load
Dear Dollar Diva,
Mutual funds offer various classes of shares, such as Class A shares,
Class B shares and Class C shares. Which class is best?
J.T.
Dear J.T.,
That's like asking which is better, a kick in the head or a knee
to the groin. Whenever you see alphabet soup, i.e., Class A, Class
B and Class C shares, when shopping for mutual funds, it means you're
paying a load. A load is a sales commission; the letter just tells
you when you'll get nicked for it. The Diva will answer your question,
but first a word about loads.
Loads and fees reduce the
overall performance of mutual funds. The Diva prefers no-load funds
with low operating fees; you can find plenty of them on the Morningstar
Web site. Morningstar provides independent mutual fund analysis,
and is a great place to start your mutual fund search.
If you are clueless about
investing in mutual funds but want to have your money working for
you while you learn more about them, put your investment dollars
in a no-load, large-cap growth and income index fund. The 800-pound
gorilla in this category is Vanguard's
500 Index Fund -- it's paltry 0.18
percent expense ratio is hard to beat.
TIAA-CREF's
Growth and Income Fund is a sort-of index fund that's also worth
looking at. According to Morningstar, part of the fund's portfolio
is tied to the S&P 500, and part of the portfolio is made up
of the manager's selections. The last time the Diva looked, the
expense ratio was a good deal at 0.43 percent.
When you get serious about
learning how to invest, invest $39 in a one-year membership in the
National
Association of Investors Corporation. NAIC is a nonprofit organization
with a 50-year history of helping folks like you learn how to invest
for their futures.
For $39 you'll get more investment
information than you'll know what to do with, including a mutual
fund handbook, written in plain English, and 12 issues of Better
Investing magazine.
Now, back to the alphabet
soup.
Class A shares
Class A shares are front-end-loaded shares; that means you get to
pay the sales commission when you initially buy shares in the fund.
If you invest $20,000 in Class A shares with a 5-percent load, $19,000
gets invested in the fund and $1,000 goes into the pocket of the
financial adviser who recommended it.
If that same fund has a 2-percent
annual expense ratio, kiss another $380 goodbye. With $1,380 out
of the pot, your investment has to earn 7.4 percent just to break
even.
Buying Class A shares only
makes sense if the fund has been a top performer for at least 10
years, you expect the fund managers to continue their brilliant
performance over the next 10 years, and you plan on owning the fund
for a long time.
Class B shares
Class B shares are back-end-loaded shares; you pay a load if you
redeem the shares within a certain number of years. The percentage
will be higher if you redeem the shares within the first year or
two, and slide down to zero by the sixth or seventh year.
But don't worry -- your financial
adviser still gets paid, even if you hold the fund long enough to
get the redemption fee down to zilch. Expect your Class B shares
to charge the maximum allowable 12b-1 fee, 1 percent, vs. around
0.25 percent for the Class A shares; the sales commission has to
come from somewhere.
For more on 12b-1 and other
fees, read the Diva's "A
load is a heavy burden on your investment," and Bankrate.com's
"Loads,
fees and mutual funds -- a primer."
Class B shares are sometimes
thought of as no-load funds because nothing comes off the top. Don't
kid yourself, a load is a load, whether it's paid on top, at the
bottom or in between, and loads and fees hurt a fund's performance.
Did you know that Class B
shares usually can be converted to Class A shares? Ask your financial
adviser about this if you're a Class B shareholder; you could save
a bundle in future fees.
Class C shares
Class C shares are level-loaded shares; the load is in the 12b-1
fee, and is paid annually as long as you own the fund. As a rule,
Class C shares cannot be converted to Class A or Class B shares.
Class C shares are a marketing
gimmick; they have no front-end load and no back-end load, so they
appear to be no-load funds. In actuality, they are the worst kind
of all because the load goes on forever.
Class C shares would make
sense if investing in equities were a short-term activity, and you
only expected to own the fund for a year or two. However, investing
in equities is a long-term activity; anyone who buys a fund with
the expectation of selling within a year or two is a gambler, not
an investor, and gamblers are notorious losers.
-- Posted: Jan. 10, 2002
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
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