The Basics Of Mutual Fund Classes

Summary: In order to get the most out of your returns, without paying a high fee, you need to be aware of the different classes of mutual fund stocks and their advantages and disadvantages. Mutual fund companies often charge a higher fee when you opt to invest in 'high risk high return' stocks. However, paying higher fees does not necessarily ensure high returns because stock prices fluctuate on a daily basis. This makes it difficult even for professional fund managers to predict the ...

In order to get the most out of your returns, without paying a high fee, you need to be aware of the different classes of mutual fund stocks and their advantages and disadvantages. Mutual fund companies often charge a higher fee when you opt to invest in 'high risk high return' stocks. However, paying higher fees does not necessarily ensure high returns because stock prices fluctuate on a daily basis. This makes it difficult even for professional fund managers to predict the future course of a certain stock. Mutual fund classes show the type of stocks covered under each mutual fund and the fees charged. The most common mutual fund classes are A, B, and C. Class 'A' Stocks These types of stocks attract lower 12b-1 fees and are considered the best if you are planning to keep investment for two or more years. Investing in such stocks makes you eligible to receive discounts, every time your investment arrives at a certain amount. The amount is selected at the time of buying the mutual fund and is referred to as the 'breakpoint'. Discounts are also offered when you express the intent of reaching the breakpoint within a specified period. However, in case you are unable to reach the breakpoint prior to the deadline, as mentioned in the 'letter of intent', you are required to pay the regular front-end fees. Class B Stocks These types of stocks are characterized by their contingent deferred sales charge and are appropriate for investors who have limited resources and are looking for long term investment. Small investors prefer these types of stocks because they are not required to pay front-end fees and the deferred sales charge keeps reducing. The other benefit is that these stocks are automatically converted into Class 'A' stocks, which have a lower yearly management expense ratio or MER. The only problem with Class 'B' stocks is that you are required to pay the deferred sales fees in case you withdraw the funds before the specified period. Another disadvantage is that you do not avail of discounts, since there are no provisions for a breakpoint. This means that you are not able to reduce investment costs even if you increase your investment. Class C Stocks These types of stocks work best for those planning to redeem the stocks within a short span of time. They are beneficial because you are not required to pay the front-end fees. The back-end load is less too, one percent in most cases. Even this one percent back-end load is eliminated if you keep the investment for more than a year. Some of the drawbacks of Class 'C' stocks include compulsory back-end load, higher MER, zero discounts and lack of provision for automatic conversions. In order to benefit from your investments, you need to consider a number of factors, such as the time for which you plan to invest, the frequency of your investments and whether you are liable to withdraw the funds in the near future. The analysis of the benefits and drawbacks of each class of stocks will help you to select the most appropriate investment option, based on your specific needs and preferences.