Putting order to mutual fund class shares is no small task for consumers given the fact that the total universe of share class choices available is 2.5 times the number of mutual funds.
Data from the Investment Company Institute, Washington, indicates that there are currently 7,989 mutual funds and 20,610 share classes. Those share classes include multiples of classes that appear in different funds. For instance, a class ‘A’ share with a commission paid up front is available in numerous funds. Each ‘A’ class choice in a fund would be part of that total.
Front-load funds represented $1.79 trillion or 27.5 % of the $6.51 trillion in total assets in open-end funds, according to data provided by Morningstar, Inc., Chicago (see accompanying chart.)
But a Google search found share classes represented by just about every letter of the alphabet not to mention share classes particular to different distribution channels ranging from advisors to retail customers to institutional funds.
For instance, a representative with Fidelity Investments, Boston, refers to different classes of A, B, C, T and I shares within Fidelity’s advisor funds. And within those classes, there are additional differences depending on the type of fund purchased and the amount of purchase.
“There is an alphabet soup, no doubt,” says David Larrabee, senior vice president-territory sales with American Century funds, Kansas City, Mo.
The question that any investor should ask is at what time classes such as A, B or C are appropriate, according to Larrabee.
In order to determine whether something is appropriate, it is really necessary to look at the size of the assets that are being discussed as well as the circumstances surrounding the individual investor, he explains.
For example, if you are going to be in a fund a long time, it is better to be in an ‘A’ share because over time you more than make up for the upfront load,” Larabee says. The front-end load leaves less money for investment when an investment is first made; so, he explains, if an ‘A’ share had a 5.75% up front load, 94.25% would be available for investment.
With a ‘B’ share, he continues, the full $100 would be available for investment. However, according to Larrabee, if an investor left a fund early, there would be a surrender penalty. When asked if it would be similar to a loan made to an investor, he agreed.
For investors with a shorter time horizon, the advisor may recommend a ‘C’ share, which is a level share load that is a de facto wrap program, he says. This type of fund share can work for consumers who don’t want to go into a formal wrap program, Larrabee continues. The usual charge is 1% for equity funds and 75 basis points for fixed income funds, he adds.
With the ‘A’ share class category in general, there can be more of a break point at certain levels of investment. And with the ‘B’ share class, there can be higher 12(b)1 fees, he adds. The concern that has surrounded 12(b)1 fees is that they have been sold inappropriately, he continues.