The A's, B's, and C's of Mutual Funds

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By Robert Brokamp (TMF Bro)
June 10, 2002

Not all shares of a mutual fund are created equal. In fact, the industry is so snooty as to have broken them up into classes.

Well, it really doesn't have anything to do with snobbishness. It has all to do with getting commissions, and permitting investors to pick their poisons. Let's review the predominant types of mutual fund shares available to the individual investor.

  • No-load: This is the Fool's favorite. You don't pay a commission (a.k.a. load) because you've done all the work yourself. All you'll pay is an annual administration fee, which can be kept fantastically low by investing in index funds.
  • Class A Shares: Investing in A Shares is like visiting an eager barber, because you'll get a significant haircut. With A Shares, a commission -- anywhere from 3% to 6% of your investment -- will get taken right off the top. So, for example, if you invest $10,000 in a fund that charges a 5% upfront commission, then only $9,500 gets invested in the fund. The rest goes to the broker and/or mutual fund company.
  • Class B Shares: You usually won't pay an upfront commission with B Shares, but you'll pay a "back-end load" if you withdraw your money before a certain time. This contingent deferred sales charge, as it is officially known, starts off high but then decreases to zero as the years go on. In the meantime, however, you'll pay a higher expense ratio than you would have had you invested in A Shares. So, instead of paying the commission upfront, it is spread out over several years. Most B Shares convert to A Shares after a few years, so the expense ratio eventually drops.
  • Class C Shares: You will pay little to nothing in upfront charges, and there isn't a back-end load, either. Sounds great, right? Mutual fund companies knew you'd say that, which is why they invented C Shares. However, what you will pay is a higher expense ratio for as long as you own the fund. Over several years, you will pay dearly.

If you use the services of a financial advisor, he or she deserves to get paid somehow. That's only fair. But it is the advisor's duty to explain the differences among the classes of shares, including how the expense structures will affect your investment. Our recommendation: Go the no-load route. Want help in finding the best no-load funds? Consider our Pick the Best Mutual Fund online seminar.

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