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You are here: Stocks Investing Guide >
Mutual Funds > Mutual Fund Share Classes |
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Mutual Fund Share Classes
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As we mentioned above,
mutual funds have different ways of charging the
customer for the loan of their money. And don't
forget, that's the definition of investing: you
are lending your money to a group of companies who
will use it for growth and expansion and then pay
you interest on your loan by increasing the value
of the company. You're doing them a favor!
Mutual funds tend to be grouped into defined
classes, called A, B and C. Some brokerages have
created their own fund classes, also identified by
letters of the alphabet such as X, Y and Z
classes. The important thing to
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know is that the fund class tells you in general what
to expect by way of fees. Even more important is the
fact that knowing the general share class is the first
step: you should always read and ask questions about the
terms of any investment before you make it, so sneaky
fees and extra charges don't surprise you and eat into
your investment.
Mutual funds have expenses, of course, and have to make
a profit as businesses in their own right. So there are
always fees somewhere, because managers and salespeople
and telephone answerers have to be paid, and there is
insurance and office rent and computers, and so on. So,
even no-load funds have expenses, which are laid out in
the prospectus and which affect the NAV (net asset
value) or each share, just as any company's operating
expenses reduce the amount of profit and the share price
of the stock. So, some no-load funds may charge as much
as (and not more than) .25% for operating expenses,
deducting them from the overall fund, rather than from
your bank account. You still pay the fees in a slightly
reduced share price, but they are spread across all the
investors, and don't hurt much in the end. But some
mutual fund companies charge a lot more than .25% of
each investment: some are veritable barracudas! So,
there are some ways of seeing right away in a
prospectus, which funds will carry certain types of
fees. No funds are the same, so you should read at least
the part of the prospectus that tells you what the
various funds are, how well on average they have done
over the past ten or more years, and what the operating
expenses are. Read on for general descriptions of the
classes of load carrying mutual funds:
Class A funds charge a front end load, which maybe 4% or
higher. Customers pay the fee when they purchase the
shares.
Class B funds don't have a front end load, but do have
what you may hear called (by the irreverent) a "back end
load". Nicer people call it a redemption fee, but either
way, it means the customer pays a fee when the shares
are cashed within a certain time period which is set by
the fund. Some Class B funds will charge if you cash out
in two years, others in five or maybe more. Most Class B
funds charge a 12b-1 fee (the marketing and sales costs
are passed on to customers with this fee), and it can be
pretty steep—1% or more in some cases. Remember, if
you're looking at a good fund averaging 12% over a ten
year period, eating up 6% in fees is going to reduce
your profits accordingly.
Class B funds may be convertible to Class A after a
certain time period—often, it's 6 years. The only reason
imaginable for taking a Class B fund in the first place
is that either you didn't know better when you signed up
and want to avoid paying the redemption fee, or a
well-meaning relative left you Class B funds. If you can
maximize your profits by turning them into Class A's by
all means do so.
Class C funds make their money off charging high 12b-1
fees, but avoiding front end fees. Some will charge
redemption fees until a certain time period has passed.
Usually, these funds can't be converted to Class A fees,
so you're stuck with the high 12b-1.
A sign of the power of a mutual fund may be found in the
fees it charges. Vanguard's S&P 500 fund has a low, low
12b-1 of .14%, which makes it very attractive to the
frugal investor. Some fly-by-night funds (which may or
may not have true experts in charge) may have exorbitant
fees. A 12b-1 of even 1% is considered reprehensible
among savvy investors.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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