Learn about Different Classes of Mutual Funds

Investors are used to glancing at their statements and tend to notice the name of their mutual fund, and of course the gains and losses over the period. However, there are typically characters that you may not pay much attention that look like this, Series A, Series B, series C.

This additional label contains very important information about the fund you own. In this article, I will explain the most common of these classifications, and what impact that may have on your investment.

Usually, mutual funds sell different classes of the same fund, which enables you to buy an investment in a variety of different ways. It is very important to know that the class of fund you buy will have a large impact on the expenses you pay, and even how your financial advisor gets paid. Keep in mind that mutual fund companies don’t always use the same letters to mean the same thing, however, most of them are fairly standard.

It is also very important to know what an expense ratio means, since that is largely impacted by the type of fund that you purchase. An expense ratio sums up the fees the mutual fund company charges to run the fund. These expenses include including paying commissions to advisors, trading costs, and other administrative expenses. The lower the expense ratio, the higher your returns will be for your mutual fund.

Class or Series A Funds

If you own a Class A mutual fund, this usually means that you own a Front Load fund. These funds require that you have to pay an upfront commission out of your pocket, that goes directly to your advisor. There is a maximum front end load that the advisor is allowed to charge, set by the fund company, and regulated by the SEC.

Usually if you purchase an A share mutual fund, the expenses are much lower on an ongoing basis. If you can handle the pain of seeing a 4-5% of your investment, these funds are usually the best long term alternative.

Class or Series B Funds

Most mutual funds that are labeled class B, do not charge you up front, but have a “backend” Deferred Sales Charge of usually 4-6 years. When you buy a mutual fund with a deferred sales charge, your advisor doesn’t receive a commission directly from your pool of assets, however the fund company will pay your advisor a commission, which typically runs from 3-5%.

Keep in mind that even though you do not pay the commission directly when you buy the fund, you are definitely charged for it over the life of the fund. Since the fund company had to pay the advisor the commission what they do is increase the expense ratio of the fund by about 0.5% compared to Class A mutual funds.

Most importantly, when dealing with a deferred sales charge, if you liquidate your holding, you have to pay a penalty to the mutual fund allowing them to make up for the commission they paid to the financial advisor. Also, most class B funds convert to a class A fund at some point in the future, at which point the funds expense ratio becomes much cheaper. Usually, deferred sales charge period and the higher expense ratio make this option much more expensive over the period of the fund.

Class or Series C, or no Load

Low or no load mutual funds work the same way as class B funds. With class C funds, the advisor gets a lower commission, usually 1%, but they get this commission on a yearly basis over the life of the fund. Class C funds are usually the most expensive long term option, because you are paying the 1% commission over and over again for the life of the fund.

The main benefit of C shares is that you never pay a penalty for liquidating the fund, which is very appealing to many consumers. However, if you are planning on holding the fund long term, this isn’t the best option.

Class or Series F

If your financial advisor charges you an annual management fee, usually based on a percentage of your assets, then chances are your own class F mutual funds. These funds remove any type of fees associated with paying commissions so the expense ratio is normally lower. This is typically done since the advisor charges you directly and the mutual fund company doesn’t have to worry about compensating the advisor.

Depending on the investment platform, class F funds can be very beneficial, since you can usually move between the funds without paying any type of fees. Since these handcuffs are removed, it takes much of the emotion out of deciding whether or not you want to get rid of your current fund in leau of a new one.