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Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

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?

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.

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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

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