ABCs of mutual fund share classes

"The first thing is there are no hard-and-fast rules about share classes," says Kunal Kapoor, editor of Morningstar mutual funds. "But, generally, I think people buy equity funds for the long haul. If that's the case, A shares should make sense. You pay the load and you're off the hook.

"Beyond that, and a lot of people don't do this, just because you have a broker, you should still find out what share classes you're being put into and how it charges you.

"When you're in any fund, regardless of whether it's load or no load, but especially with a load fund, they're very costly to buy. You don't want to buy A shares and then buy more. Keep the number of transactions low."

You might want to consider B shares, or a back-end load, if the commission is fairly low, say 3 percent, and it has a low 12b-1 fee (less than 1 percent.) You'll need to know your time horizon and when the contingent deferred sales-charge period ends, and then crunch the numbers to see if this is the cheaper route.

Class C shares, or level load, may be best if you think you're not in it for the long haul, says Lipper's Lucas Garland.

"Level load is good for when you're unsure of your time horizon and there's a chance you'll take the money out sooner. The disadvantage is it never allows you to transfer to A shares."

Morningstar's Kapoor says he's not in the camp that says all loads are bad, but he advises caution when considering B or C shares.

"I'm less enthusiastic about B and C shares because they were created to make it easier to sell the funds, not to enhance the investor's return. It's a lot easier to sell to someone if you don't take an upfront payment from them, and often investors don't ask the right questions. Investors need to be a little more responsible for the decisions their broker is making. Evaluate their advice just as you would the advice from your doctor or dentist."

Jack Piazza is a registered investment adviser in Wheaton, Ill. His company, Sensible Investment Strategies, is a testimony to his staunch belief in no-load funds.

"The ideal situation would be to invest in a no-load fund with very low annual expenses and no 12b-1 fees. That's the ideal scenario every investor should look for; and they're out there," says Piazza.

Piazza has assembled a couple charts showing how loads and 12b-1 fees eat into returns. Annual expenses aren't included since they're charged by all funds.

The examples assume a $10,000 investment earning 9 percent a year. The first chart looks at cumulative returns over three years; the second compares the cumulative return on investment as a percentage over three years.

Cumulative returns over three years
	Start	Year 1	Year 2	Year 3
No-load, no 12b-1 fee	$10,000	$10,900	$11,881	$12,950
Class A 5.75% Front-end load 0.25% 12b-1 fee	$9,425	$10,248	$11,142	$12,114
Class B 3% Back-end load 1% 12b-1	$10,000	$10,791	$11,645	$12,189
Class C 1% 12b-1	$9,900	$10,683	$11,528	$12,440

"Expenses are very important in equity funds but even more so in bond funds," cautions Piazza. "If someone is interested in a bond fund, there's no justification for paying a load. If you buy $10,000 in a bond fund and pay a 4.75 percent front-end load, for the vast majority of funds that's higher than a year's worth of interest."

Some fund companies do a better job than others at showing the varying costs and returns on the different share classes within a particular mutual fund. Here are three free Web sites that can help you calculate the cost of a fund by share class:

• The U.S. Securities and Exchange Commission's mutual fund cost calculator.
  
  
• Morningstar.com
  
  
• Lipper Leaders System. Lipper measures five things: total return, consistent return, capital preservation, tax efficiency and expenses.

Here's a caution about buying front-end load funds: People who invest more than $50,000, and sometimes $25,000, in one fund family are often entitled to break-point pricing. That means you get a discount on the sales charge. The SEC says it and other securities regulators recently examined thousands of mutual-fund transactions by 43 broker-dealers that sell front-end load funds. Nearly one in three transactions that appeared eligible for break-point pricing did not receive one. Those customers missed out on an average discount of $364 per transaction.

The SEC says most of the break-point problems did not appear to be intentional. The most common cause was the broker didn't link the customer's ownership of different funds in the same fund family to reach the break point.

Whether a broker is handling your account or if you're managing your own transactions, make sure you're aware of the break-point rules within any fund family that you own.