Different Types of Mutual Funds & Their Class
Our investment blog reviews one of the biggest surprises that investors in mutual funds have and most don’t even realize how important it is know: different types of mutual funds and their class-type. As you search high and low for the best mutual fund, you’ll need to pay close attention to these three categories. When looking at the various low risk mutual funds offered, you may wonder what the A, B and C on the different classes mean. Is this like high school and some didn’t do as well as others? In this edition of our investment blog, we’re going to look at what those letters mean and how they apply to the best mutual fund for you.
Different Types of Mutual Funds: Defining a Share Class
Every mutual fund uses something called “share classes.” The different types of mutual funds in the United States use the letters, A, B and C to identify the share class of each mutual fund. As you look for the best mutual fund that meets your tactical asset allocation models, you’ll see the share class that’s available. Just because a fund has Class B shares doesn’t mean it’s less desirable than a fund with Class A shares. However, low risk mutual funds with Class A shares may have higher potential returns. When looking at investment management solutions to meet your investment goals, you should be familiar with each share type.
Class A Shares: The Best Mutual Fund?
Class A shares in low risk mutual funds are what are known as “front end loaded.” What this means is that the fees are calculated based on your initial purchase in the fund. When you sell the shares, the fees are reduced from the principal. Front end fees can run as high as 7 percent, even in low volatility mutual funds. If you hold the funds short-term, your gains can be eaten up by the fees. Depending on the amount of your initial investment, you can receive a reduction on these fees. Initial investments of $25,000 or more generally qualify for a 25 to 50 percent reduction in front end fees. Maintenance fees and expenses such as the infamous 12-b-1 fee maybe lower than other classes of shares. The 12-b-1 fee is a marketing and distribution fee that is specifically permitted by U.S. government regulations.
Defining Different Types of Mutual Funds: Class B Shares
Class B shares are, in some ways, the opposite of Class A shares. In Class B shares, investors pay “back-end loads” when they sell the shares. Like their Class A cousins, fees can be as high as 7 percent. The nice thing about Class B shares in the best mutual fund is that they will convert to Class A shares after a specified period of time, such as 7 years. If you redeem your shares after that time, there are no fees for redemption. Class B shares also have lower maintenance fees and expenses than Class C shares, but generally have higher 12-b-1 fee as well as higher annual management fees than Class A Shares.
Defining Different Types of Mutual Funds: Class C Shares
Class C shares don’t have front end loads and relatively low back-end loads, generally 1 percent or less. Low risk mutual funds with Class C shares can be the best mutual fund for investors who are looking to make money in the short-term, usually within 2 years, but there are drawback an investor must be wary of: While their lack of upfront and exiting fees may appear appealing at first glance, they tend to have high maintenance and marketing fees and expense ratios, especially when compared to Class A and Class B shares. Unlike Class B shares, Class C shares do not convert to another type and can be difficult to cash in.
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