Mutual funds offer different classes of shares typically
named Class A, Class B and Class C shares. Each class has its unique
fee structure which offers advantages and disadvantages to investors.
Class A shares include a one-time sales charge when you buy the
fund. For example, if the sales charge (sometimes called a load)
is five percent, only 95 cents of each dollar that you invest goes
to work. In addition, the fund will charge another fee each year
that you hold the fund. This expense ratio helps pay for the management
and promotion of the fund. With Class A shares you pay no fee to
sell your shares.
Class B shares do not include an up-front sales charge to buy them
but will charge you a fee to sell your shares. Typically this redemption
fee decreases the longer that you hold the shares. And the Class
B shares annual fee is usually higher than the Class A annual fee.
Class C shares do not include a fee to buy them, and if you hold
your shares for more than one year, there is no redemption fee.
But the annual fee for Class C shares is usually considerably higher
than the annual fee for Class A or Class B shares. So Class C shares
are inappropriate for long-term, buy-and-hold investors because
the relatively high annual fees will significantly reduce your total
return return. And the longer you hold the shares the bigger the
reduction.
For example a $10,000 initial investment in the Phoenix Foreign
Opportunities Class A (JVIAX)
that earns six percent each year for 25 years would be worth $28,798.
But Class C shares of the same fund would be worth only $25,247,
a 12.3 percent reduction. After 50 years Class A shares would be
worth $87,989 and Class C shares $63,742, a whopping 27.6 percent
reduction.
However, Class C are great if plan to hold the shares for just a
few years because you would avoid all sales and redemption charges,
and the effects of the higher annual fee would not be too significant.
If you want to avoid analyzing the complicated fee structures
impose by mutual funds, buy exchange-traded funds (ETFs) instead.
Most ETFs charge much lower fees than corresponding mutual funds.
Related Articles:
Avoid Managed Mutual Funds
Exchange-Traded
Funds
Mutual Fund Fees
Posted August 9, 2007.
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