Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The ABCs of Mutual Funds

Nobody wants to pay too much for something. Whether you’re buying a car, a house, or a big ticket item you’ve been eyeing… we all want the best deal, the best product, and the best price. That’s what being a smart consumer is all about. Investing in mutual funds shouldn’t be any different. But paying the lowest price, and getting the investment advice that’s right for you, isn’t always as simple as making a phone call to your broker. All mutual fund shares are not created equal… and those inequalities can cost you money. You need to know exactly what you are buying…and what you’re paying for.

Mutual fund share are divided into classes… A, B, and C. These categories vary widely in their expenses, and the time horizon that makes them work.

First, a little about mutual fund expenses. All mutual funds have administrative expenses – there’s no getting away from that. Mutual funds often carry loads – this is a sales commission (you will pay a load when you buy a mutual fund through a broker). You might also see 12b-1 fees: these are advertising and marketing fees.

 

And now the ABCs:

Class A shares have front-end loads. This means that you pay a sales commission with your initial investment in the fund. For this reason, these shares are not ideal for an investor with a very short time horizon. The front-end load decreases your initial investment, and in turn, eats into your return. If you only plan to hold onto shares for a year or two, this load is not ideal.

The positives: These shares tend to have lower 12b-1 fees. Class A shares also have breakpoints – this means that if your investment reaches a certain amount, the load will be discounted. So, your broker will get a reduced commission. If you plan to hold shares for a time, the lower fees associated with class A

shares are attractive.

Class B shares have back-end loads… you pay a commission when you redeem your shares. This means that your entire initial investment earns a return. Class B shares do not have breakpoints like class A shares (the commission you pay will not be reduced if your investment reaches a certain amount). And they tend to have higher 12b-1 fees (the maximum allowable is 1%).

The good news: these shares have a deferred sales charge…this means that the longer you hold your shares…the lower the load.

Class C shares have a level load (this load comes in the form of 12b-1 fees). This means that you pay fees

The bad news: the level load will not be discounted after your investment reaches a given amount, or after a number of years. Because the load simply continues on year after year unabated, class C shares are great for brokers…and terrible for investors.

Be a smart shopper when you are in the market for investment products. Just like anything else you spend money on… make sure you pay the right price when you invest in a mutual fund.

every year that you own shares. Not only that, these shares also have a back-end load (though it tends to be lower than class B shares, and may be waived if you hold your shares for over a year).


Disclosure: none