What it is
Funds that charge sales commissions -- often known as "loads" -- often sport multiple share classes that are organized alphabetically. "A" shares tend to come with an upfront fee or "front-end load." "B" and "C" shares tend to charges fees when you exit a fund, otherwise known as a "back-end load."
We're going to focus on the latter because, when I last covered this topic, I made the mistake of not specifying that fees decline for those who hold back-loaded B shares for many years.
Let's revisit AIM Multi-Sector
How it works
But you still may do better investing in a no-load choice like Schneider Value, which, like Multi-Sector, has investments in big companies like Hilton Hotels
"It's generally the plan that, if you hold B shares for a period of time, they convert to A's," Shannon wrote in a recent email to me. "Trouble is, you've paid that crazy expense ratio along the way, and for the conversion to kick in, you have to hold the shares for the specified period -- even if, for instance, the fund's manager or its strategy change." [Emphasis mine.]
Therein lies the problem. Comparatively, Multi-Sector is a young fund, having opened its doors in 2002. Two members of the five-person team joined last year, and one came on board in 2004. What if you invested today and both of the original managers left next week? You're stuck. Unless, that is, you want to pay the back-end fee.
Go under the hood
Others cite a lack of flexibility. Foolish poster anuvaka from our Mutual Funds discussion board writes, "I owned some B shares that turned to A over time, bought from a broker. It takes a long time for the conversion to occur (8 years, if I remember). ... Re-allocation became a problem, as selling or buying any shares changes the clock."
That's tough. We Fools are generally buy-to-hold investors, but there are instances when changes are necessary. And not just when managers leave or strategies change. Sometimes, fees increase. To use an extreme example, if Multi-Sector raised its expense ratio from the princely sum of 2.12% to a king's ransom of 3% in year three, would you still want to own the fund? Probably not.
How can you find good no-load alternatives? Check with Morningstar.com. The site allows you to see both what stocks your favorite funds hold and, conversely, what funds hold your favorite stocks. That's how I knew Schneider Value, a top no-load performer, would give me much of what AIM Multi-Sector offers.
Follow the money
For advisors, there's logic to loads because they get paid. But that's rarely the case for you. All you'll do is pay more for very little -- if anything -- in extra performance.
Meanwhile, by investing in B shares, you'll commit your portfolio to at least five years of a fund that may be a shadow of its former self when the back-end load expires. Are you willing to take that risk? It's worth asking before you invest.
Finally, if you still need money-saving advice, consider Green Light. Therein, Shannon and co-advisor Dayana Yochim show you how to unlock the hidden fortune inside your paycheck. There is $686 worth of tips in the January issue alone. Click here to get your copy and 30 days of free access to the service. There's no obligation to subscribe.
Interested in more mutual fund basics? Your digital chariot awaits:
- What is an expense ratio, anyway?
- Turn over the rock on portfolio turnover.
- Sometimes, five-star funds provide one-star returns.
- Stop your broker from sharing so much.
- Find out if you're overpaying to invest.
- Take an exotic tour of fund categories.
- It can be hip to be R-squared.
- Is your fund manager sweetening your returns?
Fool contributor Tim Beyers, ranked 1,007 out of more than 20,800 in Motley Fool CAPS, didn't own shares in any of the companies mentioned in this article at the time of publication. Get a peek at everything he's invested in by checking Tim's Fool profile. Fannie Mae is an Inside Value pick. JPMorgan Chase is an Income Investor selection. The Motley Fool's disclosure policy is grade A.