Deciphering the Different Classes of Mutual Funds

Investing in mutual funds also includes the fact that you have to pay your broker a lot of fees. Some mutual fund brokers will make it seem to you that the higher fee you pay, the higher return you will achieve on your investment. This is NOT true. All the broker will be doing (if you pay a higher fee) is take greater risks with your money, which could have devastating consequences.

In order to avoid paying high fees to your broker and to maximize your ROI (return on investment), you should consider the different classes of mutual funds to purchase and which class is the right one for you.

Mutual Fund Classes?

Just as stock classes indicate voting rights between common & preferred shares, mutual fund classes show the type of mutual fund being purchased, and the fees involved. There are 3 main types of mutual funds: Class A shares, Class B shares & Class C shares. We will look at each of these mutual fund classes in depth below:

Class A Shares

Class A shares will charge you a front-end load (a sales commission fee charged when you initially purchase a mutual fund investment) at the time you purchase into the mutual fund investment.

Advantages of Class A shares

Class A shares have lower 12-b1 fees (0.5% to 1% of the total value of a mutual fund going into marketing expenses) that will be beneficial if you plan to hold onto the fund for the longer term.
BreakPoints: If your investment reaches particular milestones, you could receive a discount off the front-end load fee. For example, a milestone could be $30,000 of mutual fund investment after which you receive a discount on the front-end load fee.
Investment Intent: Some mutual fund brokers will give you a discount on your front-end load fee if you tell them you plan to invest for the longer term, and reach particular milestones (such as the $30,000 milestone above).
Accumulation Right: If you reach the breakpoint in your 2nd installment payment, you could receive a discount on the front-end load fee. For example, if the breakpoint is $30,000 and your initial investment = $15,000, if you make a $15000 investment on your 2nd installment, you would receive a discount on the front-end load fee.

Disadvantages of Class A shares

If you cannot pour in enough money to reach the breakpoints, you will be charged a high front-end load fee.
Class A shares are for long term investors and not short term. This is proved by the high front-end load fee you will be paying if you investment in those shares.

Class B Shares

Class B shares will not charge you a front-end load but will charge you the back-end load (a sales commission fee charged when you sell your mutual fund investments within a certain # of years). Class B shares are preferable for short term investors with little cash, who want to invest for the longer term.

Advantages of Class B shares

Class B shares have no front-end load fees.
Lower Deferred Charges: The longer you hold on to your mutual fund investments, the lesser deferred charges you will be paying.
After a certain # of years, Class B shares will automatically be converted to Class A shares. This is good because Class A shares have less management expense ratio (fees charged for the operations and investment management of mutual funds) than Class B shares.

Disadvantages of Class B shares

If you withdraw your investment within a certain period of time (between 5-8 years), you will be charged a back-end load fee.
Class B shares do not have the breakpoint system (to reduce the front and back-end load fees) like that of Class A shares. This means discounts in the amount of fees you pay is NOT available for Class B shares.
Class B shares will charge you higher management expense ratio fees than both Class A & Class C shares.

Class C Shares

Class C shares are preferable for short term investors with little cash and a short term investment outlook. Class C shares are level-load funds (funds that charge an annual "load" or fee for the first time mutual fund investor).

Advantages of Class C shares

No front-end load fees.
A small back-end load fee of 1%
If you hold the shares for >1 year, the back-end load fee is eliminated.

Disadvantages of Class C Shares

You will be charged a back-end load fee if you withdraw funds within the 1st year.
Class C shares charge a higher management expense ratio (MER) fees than Class B shares.
Class C shares cannot be converted to Class A shares to reduce or lower the management expense ratio (MER) fee.
Class C shares do not have the breakpoint system (to reduce the front and back-end load fees) like that of Class A shares. This means discounts in the amount of fees you pay is NOT available for Class B shares.