What class are you?May 29, 2015 12:00 am
I’m not talking about your airline ticket or your social hierarchy. I’m referring to your Mutual Fund Share class. Yes, they have a class too. Today we’ll stick to three of the more popular fund classes: A, B and C shares. All of them charge a commission and all three classes of the same Mutual Fund invest in the same portfolio of investments with the same fund objectives. Do you know why you are in an A class or B class share? Did you know you might have a choice in share classes and depending on your investment goals, one class might be better for you than the other? There are many advisors who may place their clients in these funds, and it’s important to know the difference. Let’s take a look at some of the basic differences of each of the three classes.
A shares charge the commission up front on your purchase (Front Loaded), and are usually a better class of funds if you intend to keep them long term. The percentage of commission charged is also usually a bit higher on A shares. You can also get what’s called breakpoints on A shares to reduce the percentage charged up front. The more money you add, the lower the up-front commission. With A shares you do not have any deferred sales charges, so when you go to sell the shares at a later date you do not incur any more commissions. This is not a particular good class to use if you plan on selling in the short term. Class A shares also tend to have lower 12b-1 fees, which are fund expenses.
B shares have a deferred sales charge, or back-end load. On your initial buy and follow up purchases, you are not charged a commission. You are charged, however, when you sell the shares. Over an extended period of time (5 or more years), B shares turn into A shares. They usually have a smaller minimum investment than A shares. So, if you can’t make the breakpoints in the A share class, then B shares may work in your favor. However, this is also a share class with which you want to have a long term investment horizon. This class does not have breakpoints, so whether you buy $5,000 or $50,000 there are no reductions in term of percentage of commission charged. The commissions on B shares go down each year until they finally convert to A shares, but B shares tend to have higher expense ratios than A shares. These are also not a good class of shares if you plan on selling short term.
This class has a lower sales charge than both class A and B, but usually a higher expense ratio than class A. They also do not convert to class A shares over time. Class C shares are a better option for short term investing (holding the shares for at least a year). With higher management fees that don’t go away (or convert to A shares), this is not the class to use over a long time horizon. Lastly, class C shares usually do not offer any breakpoints or discounts.
Bottom line: always read the fund prospectus before buying and if you are going through a broker ask what class of fund shares are available and if they meet your investment objectives. If you want to skip the whole commission based mutual funds issue, you can always look at a fee-based investment advisory firm. For even more details on this subject, see the FINRA website.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Sean’s opinions and comments expressed on this site are his own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.