Mutual Funds Classes - ( A-B-C )

Class A shares

Class A shares are front-end-loaded shares; that means you get to pay the sales commission when you initially buy shares in the fund. If you invest $20,000 in Class A shares with a 5-percent load, $19,000 gets invested in the fund and $1,000 goes into the pocket of the financial adviser who recommended it.

If that same fund has a 2-percent annual expense ratio, kiss another $380 goodbye. With $1,380 out of the pot, your investment has to earn 7.4 percent just to break even.

Buying Class A shares only makes sense if the fund has been a top performer for at least 10 years, you expect the fund managers to continue their brilliant performance over the next 10 years, and you plan on owning the fund for a long time.

Class B shares

Class B shares are back-end-loaded shares; you pay a load if you redeem the shares within a certain number of years.

The percentage will be higher if you redeem the shares within the first year or two, and slide down to zero by the sixth or seventh year.

But don't worry your financial adviser still gets paid, even if you hold the fund long enough to get the redemption fee down to zilch. 

Expect your Class B shares to charge the maximum allowable 12b-1 fee, 1 percent, vs. around 0.25 percent for the Class A shares; the sales commission has to come from somewhere.

12b-1 - fees, An annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25-1% (the maximum allowed) of a fund's net assets. The fee gets its name from a section in the Investment Company Act of 1940.

Class B shares are sometimes thought of as no-load funds because nothing comes off the top. Don't kid yourself, a load is a load, whether it's paid on top, at the bottom or in between, and loads and fees hurt a fund's performance.

Did you know that Class B shares usually can be converted to Class A shares? 

Ask a professional about this if you're a Class B shareholder; you could save a bundle in future fees.

Class C shares

Class C shares are level-loaded shares; the load is in the 12b-1 fee, and is paid annually as long as you own the fund. As a rule, Class C shares cannot be converted to Class A or Class B shares.

Class C shares are a marketing gimmick; they have no front-end load and no back-end load, so they appear to be no-load funds. In actuality, they are the worst kind of all because the load goes on forever. Class C shares would make sense if investing in equities were a short-term activity, and you only expected to own the fund for a year or two. 

However, investing in equities is a long-term activity; anyone who buys a fund with the expectation of selling within a year or two is a gambler, not an investor, and gamblers are notorious losers.

If you are considering Retirement Planning, call for a free consultation today.