Educational Programming Video
The Value Line Mutual Fund Survey
Program 9: Share Classes Part II
Over the next couple of sessions, we'll continue our discussion of some mutual fund basics that every fund investor should know. This lesson concludes our review of mutual fund share classes by taking a look at some of the more esoteric options that mutual fund companies offer.
Last time we covered the three basic share-class options that are available to mutual fund investors. First was the no-load fund (or commission structure), where there are no fees involved in the purchase or sale of a fund's shares. Next were the A- and B-share classes, where the former normally caries a front-end load, and the latter a back-end load. Both of these load types were discussed in more detail in earlier sessions. The point to take from this is that the basic difference between all of these types of shares is the fee you pay.
Mutual fund companies, however, don't stop there. They offer a plethora of payment options, including C-, D-, I-, Y-, M-, and Z-share classes. Let's take a quick look at each one.
C-shares are more easily remembered as level-load funds. These shares often carry a very small front-end load, or, sometimes, no load at all. You make up for the lower load, however, with higher ongoing expenses, mostly through the fund's 12b-1 fee. The 12b-1 fee is an "advertising" fee that fund companies sometimes attach to a fund's expenses. The fee will be discussed in more detail in another session. Although lower front-end costs are nice, the higher ongoing expenses can diminish your return over the long haul.
D-Shares can be anything a fund company wants. Most often, though, they represent back-end loaded shares that have a different price or expense structure than B-shares. The difference could be in the 12b-1 fee, or in the number of years the fund must be held before the fee reverts to zero.
I- and Y-shares are usually institutional or high net worth share classes. In short, to get in to these share classes you need a lot of money. Often the minimum investment for these shares is in the million-dollar range. While some I- or Y-share classes may have size requirements as low as $100,000, you are still talking about big bucks. Because of the size of the initial investment, these shares usually don't carry sales loads, and, sometimes, the ongoing management fee is lower than for other share classes. Smaller investors might find these funds offered through a work sponsored retirement plan. If this is the case, individuals are not expected to come up with the minimum investment. It is assumed by the fund company that all of the employees combined will invest enough money to meet any minimum investment requirements that are in place.
M-shares are the great "catch all." There is no standard for these shares, and fund companies use them for a myriad of purposes. Some have front-end loads, some have back-end loads, and some are level-loaded funds. Make sure you examine this option closely before jumping in, if a fund company offers this share class, there is something different about it.
Lastly, there are Z-shares. This share class is usually used to signify shares in a fund that started off as a no-load offering, but that later changed to a load fund. This can happen for a number of reasons, such as a fund merger. Usually these shares are not available to new investors. If your shares have been converted to Z-shares, however, don't worry; it shouldn't change anything about your load structure.
One more class of shares you should be aware of is the advisor class. Very often, no-load fund families decide to start offering loaded versions of their funds. This is done to increase the distribution channels through which their funds are offered. This share class generally has 12b-1 fees attached to pay financial advisors who put their clients' money into these funds.
The most important thing to remember when examining what share class you want to purchase is to examine all the literature that is available. Really understand what you are getting into.
If you are paying a load, you are most likely using a financial advisor or stockbroker. Double-check what he or she is telling you. Make sure that the options you were given were the best ones for you.
There are some other questions to ask. For one, what happens if you need to get your money out quickly? If you are in a back-end load fund, you might have to pay hefty fees, while in a front-end load fund, you already paid the fees and can't get them back. Perhaps a no-load fund or, if you expect to need access to the money in a very short period of time, a money-market fund (a cash equivalent) is the best option.
For some of the share-class choices mentioned above, smaller up-front charges may be enticing, but the higher ongoing costs may do more harm than you think if you hold onto the fund for a very long period of time. Talk with your financial planner. It might make more sense to "bite the bullet" and pay the higher purchase charges.
As always, caveat emptor…let the buyer beware. Read the fund's prospectus and annual or semi-annual report before you make up your mind which share class to buy. Each of these fund reports provide information about expenses, sales charges, and returns that you need to know and understand.