That’s right, FEES!
Those A’s, B’s, and C’s tagged onto the end of your mutual funds stand for horrible, nasty, unnecessary fees. You see, mutual funds have several different share classes. These share classes determine how your financial advisor gets paid. So a share class is really just the fee structure for your mutual fund.
Examples are always best to explain things like this.
Let’s take a look at the mutual fund called American Funds Capital Income Builder. This mutual fund has 11 different share classes, or fee structures. I won’t go into all of them, but here are the different fee structures for the 3 most popular share classes.
The A-share class has a big Front-End Fee of 5.75%. Investing $10,000 in this fund would cost you $575, so you’d actually be investing $9,425 in this fund after the advisor takes his $575 commission. In return for paying a big front-end fee, the investor pays a smaller 12b-1 fee (an ongoing commission that also goes to your financial advisor) and a lower overall mutual fund expense ratio of 0.59%.
The B-share class has no Front-End Fee, but there is a huge 5.00% Back-End Fee. Let’s say you take that same $10,000 and it grows 5% each year for two years. The investment is now $11,025 and you’d like to sell it. The commission will be $550 or 5.00% of the current market value. B-shares also have a high 12b-1 fee and overall expense ratio.
The C-share class also doesn’t have a Front-End Fee, and the Back-End Fee of 1.00% is smaller than the B-share class fee of 5.00%. But the overall expense ratio is a lofty 1.38% that includes a 1.00% 12b-1 Fee.
There is another type of mutual fund that is “no-load”.
Let’s take look at a typical no-load mutual fund called Vanguard 500 Index:
Vanguard has different types of share classes for its mutual funds. Instead of “A”, “B”, or “C”, Vanguard has Investor Shares, Admiral Shares, and Institutional Shares. As you can see in the table, there are no Front-End, Back-End, or 12b-1 Fees. That’s because this is a no-load fund.
The only difference between the share classes is that they have different expense ratios.
The Investor share class has an expense ratio of 0.16% while the Admiral share class has a lower expense ratio of 0.05%. The reason is Investor shares only require a $3,000 minimum investment while the Admiral shares require a $10,000 minimum investment.
I also want to bring attention to the fact that no-load mutual funds have much lower expense ratios than load funds. Simply compare the last column for both the funds listed above. The Capital Income Builder C share class has an expense ratio of 1.38% compared to 0.16% for the Vanguard 500 Index Investor share class. This is true across the mutual fund universe. No-load funds are less expensive than load funds.
That’s it in a nutshell about some of the different types of mutual fund share classes
If you have any A, B, or C shares in your portfolio, then it’s time to give Rowling & Associates a call for a portfolio review. We can calculate how much you are paying in unnecessary fees and make recommendations to get out of those expensive load funds.
