Last week, we took an introductory look at mutual funds, but there’s a lot more to learn than just the basics. We briefly discussed the fees associated with some mutual funds, which are often called “sales loads.” Now that we’ve familiarized you with the overview, let’s delve a bit further into mutual fund share classes.
What Are Mutual Fund Share Classes?
We already established that when you buy into some mutual funds, you’re required to pay fees called “sales loads.” There are instances where you will come across “no load” mutual funds, which don’t require you to pay any fees. However, the funds that are accompanied by various types of sales charges are also distributed across a number of different “share classes.”
These share classes determine the means by which you’ll be compensated for your investment. Because everyone is different, we all have our own methods and opinions when it comes to how we choose to invest our money. Different share classes will appeal to different people, depending on your investment style, so it’s important to know what you’re getting yourself into when choosing a mutual fund with multiple share classes.
Types of Mutual Fund Share Classes
Mutual Fund A Shares – Upfront Fees
In these instances, the “sales load” for your mutual fund is taken upfront, meaning the fee amount is deducted from the amount you invest initially.
For example, suppose you invest $10,000 in the Smith Mutual Fund, which offers multiple share classes. The fund’s A shares have a 5% sales commission that you have to pay upfront. That means you’re paying $500 initially (5% of $10,000), which gets you $9,500 of Smith shares in your account.
Because you’re starting off with fewer shares, this means that your return will be lower. However, A shares generally don’t have charges when you sell them, so you’re able to be more flexible when designing your investment strategy. There are additional fees that are ongoing throughout the duration of your investment, such as charges for distributions and other services. One of these, 12b-1 fees, are generally quite a bit lower for A shares than other share classes.
If you chose to go the A shares route, you’d be agreeing to pay a fee upfront in exchange for no future sales charges and recurring costs that aren’t too rough to manage.
Check back with us next week as we continue exploring the different mutual fund share classes!