What do different mutual fund classes mean?
Many different types of mutual fund classes are available to choose from. Having so many stems from the broker’s compensation and a less sinister means of matching fees with an investor’s time horizons.
The basic fund share classes are discussed below and also included is the one most fee-only advisers utilize for their clients’ portfolios—the I class.
Class A is probably the most popular among fee-based brokers and advisers. They typically charge an up-front fee—a “front-end load” that is subtracted from your initial investment. Here’s an example of a $10,000 purchase of the Example Fund:
|Subtract: Load at 5.75%||$575|
|Your investment net of commissions||$9,425|
Your investment starts with $9,425, and $575 went to your broker as a commission for recommending the investment.
Class A mutual funds also include a 12b-1 fee, which typically ranges between 0.25% and 1.00% of your investment per year. The original intent of 12b-1 fees was for the fee to be used by the mutual fund company to market to new investors in an effort to attract more assets and lower the overall cost of smaller funds as they grow in size. Over time, the 12b-1 fee has morphed into a backdoor for your broker to collect additional fees from your investment on an ongoing basis.
Class A mutual funds are typically best for investors who have very long time horizons.
Class B doesn’t charge any front-end load, but what is often called a Deferred Sales Charge is applied on the back end. This Deferred Sales Charge often goes down over time as a percentage of your net proceeds when you sell your shares, and if you wait long enough they transfer to Class A shares. Investors will pay more in ongoing management fees (or the fees the adviser charges to manage the fund), as well as increased 12b-1 fees, typically 1% of assets in the fund.
Class B is the least popular fund class, and there is little reason for any investor to invest in this share class.
Class C is typically called level-load share class. No up-front fees are charged, and back-end loads are kept lower than those in Class B. In addition, the Deferred Sales Charge expires after holding the shares for more than one year. Management fees are actually higher than Class A funds, and 12B-1 fees are around 1%.
Class C shares are often sold as better alternatives for an investment if your time horizon is shorter.
Class I is also called the institutional share class. These funds are no load, meaning that 100% of what you invest is allocated to the fund, and no commission is paid to your adviser or broker. They also avoid 12B-1 fees, saving investors from 0.25% to 1.00% per year. In addition, management fees are the lowest among all share classes. Although these funds seem attractive, the minimum investment required for this share class is $1 million, simply putting them beyond the reach of most investors. I Class shares are typically invested in by financial advisors on behalf of their clients. Advisers can typically pool client assets to qualify for the $1 million minimum investment, thereby saving clients money in fees and expenses. Most fee-only advisers invest their clients’ assets in the lowest-cost I-Class shares.
It’s hard to imagine a scenario where investors wouldn’t be better off with I Class shares, regardless of the time horizon. As a result, the vast majority of money that R. W. Rogé & Company manages for its clients is invested in institutional class mutual funds.