A shares, Z shares, R shares, B shares… A degree in cryptography might seem necessary to crack the code of mutual fund share classes.
There are roughly two dozen classes available; however, I’ll spare you the headache and provide a brief rundown of the most noteworthy.
Taking a quick step back, a mutual fund is an investment vehicle that pools together monies from multiple shareholders to purchase securities, typically stocks or bonds. Shareholders receive benefits in the form of diversification, exposure, professional management and technological resources. The value afforded by utilizing mutual funds within one’s portfolio is deserving of its own blog post.
Within this overview, I will isolate pertinent details of the most commonly used (and often-times, detrimental) share classes in the marketplace. The mutual fund share classes you may hold in your portfolio can be problematic without an awareness of the cost implications.
The most commonly used (and potentially harmful) mutual fund share classes
· Class A shares typically contain what is called a front-end sales load
· This is a commission that is charged when you purchase shares and commonly ranges from 4.75% to 5.75% of the purchase amount
· The following illustrates how the front-load fee is paid: You contribute $5,500 to your Roth IRA and invest the entire amount with a front-end load of 5.75% ($316), only $5,184 of your $5,500 contribution will be invested
· Class B shares commonly employ a back-end load
· A back-end load is a commission for selling your shares within a certain time frame (usually up to 7 years) and can be as high as 5.00%
· Back-end loads are designed to encourage a longer-term investment in the fund, and typically decrease over time, oftentimes reducing to zero if the specified term is reached
· For example, if you had invested $5,000 in a class B fund and sold it later that year when the value reached $5,500, with a back-end load of 5.00% ($275) you would receive $5,225
· Class C shares typically enforce a back-end load of around 1.00% if you sell your fund within one year of the initial purchase
· Following our example above, when you sold your shares valued at $5,500 you would receive $5,445
The lowest cost mutual fund share-classes
· Class R shares do not contain a front-end load or a back-end load, but are typically only available in retirement plans such as a 401(k) plan
· Similar to Class R shares, Class Z share do not contain a front-end load or a back-end load
· Z shares are typically available only to employees of a mutual fund company, and are offered as part of their compensation package
· Also known as Institutional shares or Class Y shares, Class I shares do not contain a front-end load or a back-end load
· Class I shares are generally only available to institutional investors and typically contain the lowest cost of any share class
· In order to purchase Class I shares, a mutual fund company may require a minimum purchase amount of $25,000 or even greater
As part of our independent investment philosophy as well as our fiduciary responsibility, we research and identify the lowest cost share class vehicles for our clients, many of which are generally not available below large investment amounts. As we are not affiliated with any mutual fund company, we continuously evaluate the value-add for each mutual fund manager we include in our clients’ portfolios. Without proper oversight or understanding, over time, the unnecessary costs from using non-institutional, commission-based share classes compound and can erode your wealth.
If you have any questions about our investment management process, please click here to reach out to our team.