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Dr. Don TaylorMutual fund share classes


Dear Dr. Don,
If you have owned shares in a class A mutual fund for many years but have not put more money into it for a few years, when you do reactivate it are you starting over with the fees (load)? -- Jackie Jumble

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Dear Jackie,
There's not an industry standard for classifying shares of mutual funds, but Class A shares typically have a sales charge that is paid when you invest in the shares. This is called a front load because the commission is paid upfront. Front loads vary by fund but usually range from 3 percent to 5.75 percent with most ranging from 4.5 percent to 5.5 percent.

New money coming into the fund would have this fee taken off the top when investing. Resume investing in the Class A shares of this mutual fund and you'll pay the front load on the newly invested funds.

Class B shares typically have deferred sales charges. You pay the sales charge when you sell the fund, and the amount of the sales charge declines each year. Often with Class B shares there is no deferred sales charge if you sell the fund after owning it for five to seven years.

Class C shares don't have a front load or a deferred load; instead they charge what's called a level load. You pay a higher annual expense with Class C shares, and part of that expense goes to compensate the finance professional who sold you the fund. There can be a contingent deferred sales load, or CDSL, if the shares are sold within a specified period. The CDSL on C class shares is lower than that of the B-class shares.

The thing to remember is that one way or another the finance professional is compensated for his advice in selling you these shares. Class B and Class C shares have higher annual expense ratios than Class A shares, so the finance professional can be compensated from these annual fees. With the Class A shares the finance professional is paid upfront, and you pay lower annual expenses.

If the Class B shares have a conversion feature, they can be converted to Class A shares after the deferred fee drops to zero. Conversion allows you to reduce the annual expense ratio on a long-term investment after the finance professional has been paid. Class C shares are the most expensive for long-term investors.

Institutional class shares, often described as Class I, usually have lower annual expense ratios and typically don't carry a sales load. Finance professionals selling institutional shares do so through an account structure that compensates them in another manner.

You don't have to buy mutual funds with sales loads. You can purchase no-load funds. There are still annual expenses to consider, and unless you manage your own portfolio, you will still have to compensate your financial adviser for the time spent in helping you create and manage this portfolio. It's not a matter of good or bad, just what's right for you.

The Securities and Exchange Commission has a mutual fund cost calculator that can help you compare the costs associated with holding different classes of mutual fund shares.

-- Posted: July , 2005




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