When it comes to mutual fund share classes,
A-B-C is as easy as one, two, fee. Yep, you read it right. The class
of share you buy in a mutual fund affects how much you pay to both
the broker and fund company in fees, surcharges and marketing costs.
"No matter what type of share you buy, you're going
to end up taking some kind of hit or charge. The manager of the
fund has to get paid somehow," explains David Root Jr., president
of D. B. Root &
Company Financial Planning, in Pittsburgh.
There's no hard-and-fast investing rule to mutual
fund share classes. They range from "A" shares to "B" shares to
"C" shares to even, "Z" shares.
Take 'A' load off
"A" shares -- If you buy a mutual fund's A shares,
you're buying a fund and paying the commission -- or load -- right
off the top. Typically, this fee is around 5 percent of your investment,
but can legally go as high as 8.5 percent, according to Chris Wloszczyna,
director of public information at the Investment
Company Institute, in Washington, D.C.
Say you invested $10,000 in a fictional mutual fund
called the Malarkey Fund "A." If you paid a 5 percent up-front "load"
charge, you'd pay $500 in commissions off the bat and have $9,500
left to invest.
If you paid an 8.5 percent load, you'll get spanked
to the tune of $850! So you start with $9,150 in the pot to buy
the fund's shares at the day's closing price, known as net asset
"Fortunately, I don't know anyone who has charged
8.5 percent in years," Wloszczyna remarks.
You'll also be socked with marketing costs called
12b-1 fees plus management charges built into what is known as expense
ratios. The higher the expense ratio percentage, the greater the
fee. The higher your portfolio value, the more you pay. So if your
fund grows to $11,000 and you have a fund with a 1 percent expense
ratio, you'll pay an additional $110 in fees. Assuming that you
paid a 5 percent load charge, that's a grand total of $610 in expenses.
But an investor should be more concerned with investment
return and management performance than charges that "nickel and
dime" you, Root says. He feels that the fund's track record is more
important than how much you get slapped with fees.
"B" shares -- If you buy class "B" shares in our fictional
Malarkey Fund, you're paying in the rear so to speak. The "B" shares
charge fees called "back-end loads" based on how long you hold the
fund. These decline over a period of generally six to eight years,
Root says. Using the $10,000 investment, you would pay no fee upfront,
and you would only pay a commission should you withdraw the money
invested within the time frame.
To your benefit, the full 10 grand is invested off
the top. Plus, if you hold the fund for more than the required time,
you avoid the commission charge.
But should the money be withdrawn in the first few
years, it's penalty time. Say the load is 7 percent after two years
and your investment has grown to $12,000 -- you'll pay $840 in fees.
Just think of the bank motto "penalty for early withdrawal."
In either situation, you're looking at paying a higher
expense ratio with B shares, states Kunal Kapoor, an analyst with
an independent source for researching fund costs and performance.
The expenses include those annoying 12b-1 marketing
fees, which tend to be higher for "B" shares than "A" shares.
From 'C' to 'D'
"C" shares -- These are funds designed for people
who want to make short-term mutual fund investments, according to
Root. You can hold them long-term -- but you'll get socked with
higher fees. "C" shares typically have high expense ratios due to
high 12b-1 fees. In most cases there is a 1 percent back-end load
if you pull out within a certain time frame.
"C" share funds have more flexibility for investors
to get in -- and get out.
"D" shares -- Less common than the first three classes
are "D" shares, hybrids of different types of fund classes. There
is no specific example for "D" shares. They vary from fund to fund.
Some "D" shares have front-end loads and no 12b-1 fees. Others have
high 12b-1 fees and no load charges.
Other types of funds out there are "M," "T," "Y" and
"Z" shares. Both "M" and "T" shares are similar to "C" shares and
are just a particular fund company's way of coming up with a new
type of hybrid for short-term investors, experts say. "Y" shares
are for institutional investors -- the big shots on Wall Street,
and "Z" shares are for fund company employees.
Now that you know your mutual fund ABCs, perhaps you're
thinking, "What about no-load funds?" These are mutual funds that
don't require commissions, and have low expense fees.
"To be honest, if you're doing your own investing,
the smart way to go is to buy no-load funds," Kapoor advises. "But
if you use an adviser, then your best option is to go to a fee-based
fund." In other words, find someone you trust, and let them do the
No-load funds are indicated in many mutual fund tables
with the initials NL. Some examples of no-loads include the T.
Rowe Price family of funds in Baltimore and a group of no-load
funds offered by Stein
Roe Mutual Funds in Chicago.
Finally, the lowest of expense charges are for index
funds. These are investments tied to a particular stock index, such
as the Standard & Poor's 500. Since there is very little management
required on these types of funds, the expenses are lower.
Fund companies are required to disclose all fees and
expenses in the prospectus. An investment adviser must give you
a copy of the prospectus before making a mutual fund sale.
No matter what kind of fund you own, expect the fund
company to chip away at it every year somehow. That's how they make
their money. The trick is to find a mutual fund that makes it worth
-- Posted: Feb. 4, 2000