Your investment time horizon is crucial when choosing a mutual fund class
As we know, mutual funds charge fees for management and other expenses. One of the ways for funds and financial advisors to earn their commissions, at the investor’s expense, is with the load fees. Typically, ‘A’ class mutual fund shares come with front load fees where the investor pays more (the ask price) than the current Net Asset Value (bid price) of the fund. So, by automatically signing up, the investor is down. By how much? It depends on the load, but can be as high as several percent. Front-end load mutual fund calculation consists of subtracting the bid price from the ask price and then dividing it by the ask. For example, if fund's price is quoted as 11.05-11.45, the calculation would be:
Loads can be higher. The maximum load allowed is 8.5%. But, it is reduced for other factors such as 12b-1 fees or when mutual funds don't allow for dividend reinvestment at NAV.
Class ‘B’ mutual fund shares are typically deferred load funds with fees to be charged when a fund is sold. The longer the investor holds the fund (and pays management fees), the smaller the charge. When the fund is held long enough, usually for several years, the load is dropped and the holdings become reclassified as ‘A’ shares. There are also ‘C’ class mutual fund shares, also known as constant charge funds, where the load is always present, but is lowered.
Some funds (which is great for the investors given that most mutual fund managers can’t beat the market) offer no loads. These are known as 'D' class shares. Seeking a good mutual fund with no load and no transaction costs is a good way to invest.
Remember one thing: watch what your investment advisors are telling you. Some may offer funds that will give them the best commissions, which is not necessarily in the best interests of the investors. When commissions come, recommendation bias can walk in. What is very important as well is to check if there’s a requirement for a minimum contribution, lasting usually over several years, in order to avoid loads.
Related articles on this site:
There are some big differences between classes of mutual fund shares. Understand them well.