Have you ever wondered what those letters and words are at the end of the name of a mutual fund? They can include letters such as A, B, C, F1, F2, F3, R4, R5, I, N, R, R5, Y and Z, plus words such as “Investor” or “Admiral.”
Mutual fund companies use different letters to designate different fee structures for each of their mutual funds. The same mutual fund is often available using different letters in their name to designate different fee structures for different segments of their clients. Words like “Investor” or “Admiral” are also used to designate different fee structures.
Learn more about the share classes for mutual funds in our article below.
In this blog, you’ll learn:
- Different Types of Fees in a Mutual Fund
- Distribution Channels for Mutual Funds
- Key Differences Among Share Classes
- How Financial Journey Partners Selects the Share Class for a Mutual Fund
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Different Types of Fees in a Mutual Fund
Share classes in a mutual fund indicate the way fees are charged for the shares in a fund. Mutual funds can have many different share classes, but the most common are A, B, C, and I (short for Institutional).
5 Types of Mutual Fund Fees:
- Upfront Sales Fee, also called a Front-End Load Fee – This is the fee that is subtracted from the initial investment at the time of the investment. Typically, there are breakpoints so that the more that is invested, the lower the fee. An investor usually has some period to reach a breakpoint, and this is called the Right of Accumulation. Investors normally sign a letter of intent stating that they will achieve a specific level of investment within a specified period so they can pay the lower fee associated with a particular breakpoint.
- Contingent Deferred Sales Charge – This is a sales charge or load, which investors pay when selling Class B shares within a specified number of years from the original purchase date. This fee is also known as a back-end load. Class B shares can carry a contingent deferred sales charge during a 5-10 year holding period calculated from the time of the original investment. The financial industry usually expresses the CDSC as a percentage of the original dollar amount invested into a mutual fund. The CDSC can also be referred to as an exit fee or redemption charge.
- C Shares Back-end Fees – Class C shares often have a 1% redemption fee, that is charged if the shares are withdrawn before the end of the first year.
- 12b-1 Fees – The 12b-1 fee is an annual marketing or distribution fee on a mutual fund. It is considered an operational expense. It is generally between 0% and 0.75%. The fee gets its name from the section of the Investment Company Act of 1940.
Expense Ratio – This is sometimes also called the “Management Expense Ratio,” and measures how much of a funds’ assets are used for administrative and other operating expenses. The expense ratio is calculated by dividing a funds’ operating expenses by the average dollar value in the fund. The expense ratio includes the management fees associated with a fund, plus the 12b-1 fees, which are the marketing and distribution fees.
Distribution Channels for Mutual Funds
There are a variety of ways that investors can purchase mutual funds, called distribution channels.
4 Types of Mutual Fund Distribution Channels:
- Retail Channel – Investors who purchase mutual funds through the retail channel often purchase the funds through brokerage accounts at large brokerage companies. These are often individual investors who make their own investment decisions and do not use a financial advisor.
- Financial Advisor Channel – Investors who work with a financial advisor to purchase their mutual funds.
- 401k Accounts – Investors who save for their retirement by using the 401k plan available at their employer; limited to investing in the funds available in their company’s 401k plan.
- Institutional Channel – These are large institutions, such as pension funds, hedge funds or banks, who purchase mutual funds in large quantities, often $1 million and above. Because the purchase size is so large, historically funds purchased through this channel had lower fees than the other channels.
There have been many changes over the past several decades to reduce the fees of mutual funds in all the different channels listed above.
Key Differences Among Share Classes
In the past, retail investors would typically choose to purchase mutual funds that are Class A, B or C shares.
5 Share Classes with Different Fee Combinations:
- A Shares – These typically charge an upfront fee that is taken off the initial investment. Class A shares typically have lower 12b-1 fees than C shares. They also typically do not have a CDSC or back-end fee. The upfront fee usually has breakpoints, to make the fee go down as the amount invested increases, and investors can sign a letter of intent that they will achieve a selected breakpoint of a set period, usually a year. Because of the upfront fee, investors using A shares tended to be longer term investors.
- B Shares – These typically do not have a front-end fee but have a contingent deferred sales charge if redeemed within a specified period of years. Class B shares typically have lower 12b-1 fees than C shares. Class B shares normally converted to A shares after a specific holding period. Investors using B shares tended to have a smaller initial investment and a longer investment horizon.
- C Shares – These typically have no front-end fee. There is often a back-end fee of about 1% if redeemed before the end of one year. The 12b-1 fee for Class C shares is typically higher than A and B shares. Investors using C shares tend to be people with a shorter investment horizon.
- I or Institutional Shares – These typically have no front or back-end fees and lower 12b-1 fees than A, B or C shares. Class I shares often have a minimum purchase of $1 million or $2 million. Because of the large purchase size, the fees are generally less than A, B or C shares.
- Other Share Classes – Different mutual fund companies use other share classes to create additional share classes. Sometimes Class F and Class R shares are used in 401k plans and have no front or back-end load, and lower 12b-1 fees. Additional share classes with lower fees than A, B and C shares are sometimes used by financial advisors in accounts that have a management fee. Vanguard has two different share classes and uses the names “Investor” and “Admiral,” rather than a letter.
How Financial Journey Partners Selects Share Classes for Mutual Funds
At Financial Journey Partners, we sometimes use mutual funds in the bond portion of client portfolios. Large investment companies like PIMCO, Fidelity, Guggenheim, Goldman Sachs, and Vanguard are able to use the benefit of their size and expertise to buy bonds in ways that an individual investor cannot. We do the research to find the bond mutual funds, from these top investment companies, that we think are best suited for our clients in the current market and interest rate conditions.
When we select a mutual fund for our clients, our goal is to work with each investment company to select the lowest cost share class available to us. We use mutual funds that have no front-end, and no back-end fees, meaning there is no cost for our clients when a mutual fund is bought or sold.
We often use institutional share classes, meaning they are the same low fees that large institutions would pay when they are buying $1 million or more of a fund. For one company, we are able to use their Z share class, which has even lower fees than their institutional share class.
If you have questions about the share class of the mutual funds in your portfolio, please contact your Wealth Manager, who can give you more information on share classes.
Financial Journey Partners is Here to Help You
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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