Making Sense of Share Classes

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By Kim Clark
From Kiplinger’s Personal Finance

Mutual fund firms have a dizzying array of share classes for their funds, such as A, ADV, B, C, I, S, Y, and Z. And if you find a fund you like, you may have to decide which share class is right for you.

There is no standard for naming fund share classes. The labels can have different meanings from fund to fund. “Deciphering mutual fund share classes can be a time-consuming and overwhelming process for retail investors,” says Matthew Garasic, a fee-only financial adviser in Pittsburgh.

Fund share classes, in addition to having different rules about who can purchase them and varying minimum initial investments, usually charge different expense ratios. In some cases, you could pay a separate sales charge, too. Those costs can add up. “The share class an investor chooses can have a long-term impact on wealth accumulation,” says Garasic.

The main reason mutual fund companies create share classes is to pay the assorted middlemen that sell their funds, such as financial advisers, insurance companies, brokerage platforms and 401(k) plans, among others, says Eric Jacobson, a director of the research firm Morningstar. The compensation for these intermediaries often comes out of the funds’ fees, hence the different share classes and their wide-ranging expense ratios.

The dividing lines between share classes boil down to three factors:

1) Sales Charges

In mutual fund speak, a “load” fund imposes a sales charge or commission when you buy or sell shares. Front-end-load classes, typically labeled “A” shares, levy a median toll of 4.25 percent when you purchase them. These shares are commonly sold through advisers, who pocket the load as a commission. On the flip side, share classes with a back-end load, typically labeled “B” and “C,” can charge you on the way out, when you sell them. B and C share classes often have higher expense ratios than A shares.

2) Initial Investment Size

Share classes typically vary by initial minimum investment, too. Some are built for deep-pocketed investors, such as retirement plans. These classes, often called Institutional or I shares, can require large initial deposits of $500,000 or more. In return, institutional shares typically have low expense ratios.

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Some fund firms also offer a break on annual fees for individual investors who are willing to fork over heftier minimum initial investments.

3) Channel

Where you hold your fund shares—in a personal account or a 401(k), for example—or whether you use a financial adviser, may dictate the share class you own.

And some fund firms create share classes to sell on broker platforms.

The best way to navigate this alphabet soup is to stick with funds that trade free of commissions and transaction fees at your online broker. If a fund is offered in a no-fee network, there’s usually just one share class available, so there’s no choosing required. And you won’t pay a front-end or back-end load. But you may pay the brokerage a short-term-trading fee if you turn around and sell the shares within 60 or 90 days, depending on the firm.

If you must pay a sales charge to buy a fund, opt for the share class with the lowest expense ratio, if a choice is available, and plan to hold the shares for the long haul.

(Kim Clark is senior associate editor at Kiplinger Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
©2023 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

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