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Open-end mutual funds are either load or no-load funds. That means
they either have some sort of sales charge, or they don’t. However,
just because you are investing in a no-load fund doesn’t mean that,
there aren’t any types of expenses. Load mutual funds charged the
investor a sales charge for purchasing the mutual fund. Loads may be
charged either at the time of sale (front-end load) or when the mutual
fund is redeemed (back-end load). There are three different types of
load funds, and their share classes differentiate them: A, B, and C
A Shares
When you purchase a mutual fund’s Class A shares, you will pay an
up-front sales charge. The charge may range between four to eight
percent of the public offering price initially, with declining sales
charges as you purchase more shares. With the initial purchase, and
any subsequent purchases, the investor pays the NAV per share plus
the applicable load. Thus, the entire amount of money isn’t invested
because part of it goes directly to the mutual fund family as the sales
charge. However, when the investor redeems his shares, he or she
will receive the NAV for the shares. There won’t be any surrender
charge for taking out the money because the front-end load was
already applied.
Class A shares are also subject to breakpoints. Mutual funds offer
investors these breakpoints to encourage a higher investment. The
fund family will set the breakpoints for each fund it offers, and when
investors hit a breakpoint, they are subject to a lower front-end sales
charge. For example, many fund families set their first breakpoint at
$50,000. Let’s say you purchase $35,000 of the XYZ Growth Fund
Class A. You then pay the highest sales load, which in this case let’s
assume to be 5.75 percent. This means that of your $35,000,
$2012.50 is the sales charge for purchasing the fund. However, let’s
say you purchased $55,000. The associated breakpoint is at $50,000
at which point the sales charge becomes 4.75 percent. Your sales
charge would be $2612.50. Without the breakpoint system, the sales
load of 5.75 percent on $55,000 is $3162.50. That’s a difference of
$550 because of the breakpoint system.
$35,000- 5.75% = $2012.50
$55,000- 4.75% = $2612.50
$55,000- 5.75% = $3162.50
$3162.50 – $2612.50 = $550 savings
Mutual fund families also offer rights of accumulation to those
who invest in Class A shares. Rights of accumulation come into play
when you have already purchased some Class A shares and want to
make a subsequent purchase. Going back to our previous example,
you have purchased $35,000 of XYZ Growth Fund Class A and wish
to make another purchase of $35,000. Rather than be charged 5.75
percent on the second purchase of $35,000, you would be charged
5.75 percent on the first $15,000 and then 4.75 percent on the
remaining $20,000. Your total sales load for the second purchase of
$35,000 would be $1812.50, rather than $2012.50 (saving you $200).
This occurs every time an investor makes subsequent purchases of
his Class A shares.
Original sales load – $35,000- 5.75% = $2012.50
$15,000- 5.75% = $862.50
20,000- 4.75% = $950
Total sales load for second $35,000 investment = $1812.50
$2012.50 – $1812.50 = $200 savings
Mutual fund companies decrease the front-end sales load as the
amount of the investment increases. The sales load is usually phased
out at $1 million. Therefore, if you were to invest $1 million with the
same mutual fund family in Class A shares, you would pay no frontend
sales load. Some fund families do charge a contingent deferred
sales charge (CDSC) of one percent for investments of $1 million or
more. For example, the mutual fund company MFS charges a CDSC
of one percent when the investment is redeemed within 12 months of
the initial investment. After that 12-month period, though, the investment
would no longer be subject to any type of back-end load.
B Shares
Class B shares do not have an up-front sales charge; rather, they have
a back-end sales charge, or a surrender charge (CDSC). The surrender
charges associated with Class B shares are similar to the surrender
charge schedules for annuities.
When an investor purchases Class B shares of a mutual fund, he
or she does so at NAV, thus ensuring that the entire amount of money
is invested. However, if the shares are redeemed within the first six
years, the investor will pay a surrender charge. The shares will be
redeemed at NAV, but then the applicable load will be subtracted.
The surrender charge schedule for Class B shares is a declining one.
After nine years, Class B shares revert to Class A shares, although no
front-end sales load will be assessed at that time.
While B shares don’t have any up-front sales load, they do tend to
have higher 12-b-1 fees inside. These fees, named after the 1980
SEC rule that allowed them, are annual sales fees, which are taken
against fund assets to compensate the fund for any sort of distribution
expenses, such as broker commissions or advertising costs. The
12-b-1 fees vary in percentage among the different fund families,
and usually aren’t more than .50 percent per year. However, they may
be as high as 1.25 percent.
Although investors are charged a surrender charge for redeeming
their shares prior to holding the fund for seven years, if they
exchange their shares for shares in a different fund within the same
fund family, there is no surrender charge. For instance, you purchase
$40,000 of Oppenheimer Global Growth and Income Fund Class B,
and a few years later you decide that you want to move $20,000 from
this fund to a different fund. As long as you keep that $20,000 with
Oppenheimer Funds and in Class B shares, you won’t be charged any
surrender charge or back-end load. However, if you wish to move
that money to another fund family, you will be charged the applicable
surrender charge.
C Shares
For many years, Class A shares were the only type of share class that
was available. Then fund families introduced the B class and,
recently, they have begun offering Class C shares. Class C shares
blend the advantages of both Class A and B shares. When purchasing
Class C shares, the investor’s money is 100-percent invested. There is
no front-end sales load, as there is with Class A shares. Plus, as long
as you don’t redeem the shares within the first year of investing the
money, you may pull out all of your money without any type of
surrender charge. Therefore, there is no front-end or back-end
load. However, your money will be subject to a one-percent surrender
charge if you redeem your mutual fund within the first
year. The rules for same-fund-family exchanges apply to Class C
shares, as they do with Class B shares. Class C shares do not
share in the conversion privilege, as do Class B shares. They will
remain Class C.
Class A versus Class B versus Class C
There is no clear-cut answer as to which share class is the best. All
three have their advantages and disadvantages. For larger amounts
of money, Class A shares would probably be the best due to the
reduction in the sales charge and since there are no back-end fees.
If your money is within an IRA, perhaps Class B shares would be
the better option. But if you wanted to invest your money and
thought that you may need it within a few years, Class C shares
may be the way to go. The share class that you invest in is really
determined by your time frame. You may find that a mixture of
share classes is preferable. |
Disclaimer
