Say Goodbye to Class-B Mutual Funds

Mutual funds are a great tool for investors -- provided they don't come with a hefty price tag. Fortunately, one often costly type of mutual fund has started to disappear.

A mutual fund may exist in several different classes of shares -- usually A, B, and/or C, with a few other options on occasion. In addition to the annual fees all funds charge, Class A shares generally sock you with a front-end load, which can be as high as 5.75% or higher. On a $10,000 investment, you'd fork out $575 from the get-go just to cover the load. Class C shares offer lower loads, but compensate with higher annual fees, which can rack up far greater costs over time.

With Class B shares, the load you'd pay up front for Class A shares is instead spread out over the first few years that you own the fund. If you sell your shares before you finish those payments, the fund company will collect the balance from whatever you make from your sale. That sounds like a sweet deal for fund companies -- so why have many of them recently begun to phase out Class B shares?

Startling differences
Check out the constrast between A and B siblings:

Fund

Max. Load*

Expense Ratio

10-Year Avg. Ann. Return

Top Holdings Include

Morgan Stanley Balanced A (BGRAX)

5.25%

1.09%

3.4%

JPMorgan Chase (NYSE: JPM  ) , eBay (Nasdaq: EBAY  ) , Schwab (Nasdaq: SCHW  )

Morgan Stanley Balanced B (BGRBX)

5.00%

1.84%

2.6%

Same as above

AIM Large Cap Growth A (LCGAX)

5.50%

1.33%

(2.9%)

IBM (NYSE: IBM  ) , Occidental Petroleum (NYSE: OXY  ) , Accenture (NYSE: ACN  )

AIM Large Cap Growth B (LCGBX)

5.00%

2.08%

(3.6%)

Same as above

Data: Morningstar.
* Loads are front-end for Class A and back-end for Class B.

Note that the B shares sport lower loads, but not much lower. Meanwhile, their annual fees, the expense ratios, are considerably higher.

Why, then, are fund companies getting rid of Class B shares? Look at 2008, when the stock market dropped almost 40%. If you had $10,000 invested in a fund, and the expenses on your Class B fund were 0.75 percentage points higher than a comparable Class A fund, you'd get a $75 haircut. But if your stake dropped to $6,000 after the market plunged, the fund collecting its take would only get $45. See the problem?

Class B shares may not have served you well in the past, but after 2008, they didn't serve Wall Streeters well, either. As a result, they're being shown the door.

According to The Wall Street Journal, fund families such as Dreyfus, Franklin Templeton, Goldman Sachs (NYSE: GS  ) , and American Century have dropped or are planning to drop their B shares. According to Morningstar and the Investment Company Institute, the B shares made up 7% of all shares in 2000, and just 1% this year. Good riddance.

Steer clear if you can
Even if class B is bidding investors adieu, you're still better off avoiding load funds altogether. There are gobs of no-load funds, and they're well-represented in lists of best-performing and most recommended funds. There's usually no need to buy into a fund with a sales load, especially one whose performance ranks among the market's many lackluster funds.

If, for some reason, you must buy into a fund with an ABC class structure, the best answer depends on your investing horizon. If you only expect to own shares a short time, then Class C is often a better bet, because you avoid a hefty sales charge. For longer periods, Class A may be the best choice -- even though you pay an up-front sales charge, your expenses are typically lower over the years.

Will you miss Class B shares? Is there some advantage to them we've overlooked? Or will you be glad to see them gone? Sound off in the comments below.

Further Foolish fund facts:

Longtime Fool contributor Selena Maranjian owns shares of eBay. eBay and Charles Schwab are Motley Fool Stock Advisor recommendations. Accenture is a Motley Fool Inside Value pick. Motley Fool Options has recommended a bull call spread strategy on eBay. Try any of our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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