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Dollars and $ense: Mutual fund share classes

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A mutual fund is an actively managed investment fund with day-to-day managers who buy and sell securities according to a plan which designates a specific purpose, style or category.

Current estimates place total net assets in domestic mutual funds at approximately $19 trillion. At present, about 60% of mutual funds focus on equities, 25% are bond funds, 10% are target date funds and 5% are money market funds.

Many mutual funds offer different types, or classes, of shares all of which invest in the same investment portfolio and will have the same investment objectives and policies.

Securities and Exchange Commission guidance on this topic states “that each class will have different shareholder services and/or distribution agreements with different fees and expenses and, therefore, different performance results.

A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals (including the time that they expect to remain invested in the fund).”

The timing and amount of mutual fund fees must be considered as you design and execute your investment plan. The choice then for investors boils down to two things: how much you pay in fees and when you pay those fees, both decisions which can have a significant impact on the long-term investment return of your portfolio.

Choosing the share class most suitable for you depends on your investing time horizon, the amount you will invest, whether you qualify for any discounts and whether the investment will be made in a brokerage or advisory account.

If you purchase a mutual fund through a retail broker you may be charged a sales load fee (as high as 5.75%) at time of purchase (Class A shares), later when you sell the mutual fund (Class B shares) or on an ongoing basis (Class C shares). A sales load fee is like a commission that investors pay when they purchase any type of security from a broker. In the case of Class A shares, the full price paid upfront by the investor is reduced (by the sales load fee) and thus not entirely invested in fund shares.

Another important fee to be considered is the 12b-1 fee, which is a fee paid by the mutual fund out of fund assets to cover distribution and shareholder service expenses. Discounts are often available at different purchase thresholds or breakpoints or if you, along with qualifying family members, hold mutual funds in the same fund family.

Class A shares are generally suitable for large amounts invested for the long term, particularly if discounts can lower the upfront sales load. Class B shares (with their higher 12b-1 fees and back-end sales charge) may be more suitable for investing small amounts over a long-term horizon. Class C shares may prove to be less expensive than Class A or B shares if you have a short investment timeline and a small amount to invest.

If you work with an investment advisor, depending on the account custodian, you may be able to purchase institutional shares (Class I) which do not carry load fees and have lower 12b-1 fees or shares which are otherwise designated as no load or load-waived.

Class R shares (aptly known as retirement shares) are available only through employer-sponsored retirement plans and carry no load fees and typically have low 12b-1 fees in a range of 0.25% to 0.50%. R shares are well suited to retirement savers interested in long-term value investing with an eye to fee efficiency and transparency.

Rick Welch is a Registered Investment Advisor (RIA) and chief investment officer of Academy Wealth Advisers. He can be reached at 215-603-2976 or rickwelch@academywealthadvisers.com.


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