Financial Tip

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Which Mutual Fund Share Class Should I Invest in During Retirement?

Which Mutual Fund Share Class Should I Invest in During Retirement?

For decades, the high cost of purchasing mutual fund shares has confounded investors trying to make the most of their investments. In an attempt to soften the criticism of high sales loads and excessive fees, the mutual fund industry introduced multiple share classes of mutual funds offering investors a choice in the way they pay sales charges.

The choices, made from Class A, Class B or Class C shares have only served to cause more confusion. Retirees especially must be able to make the right choice because it could have an impact on how far their retirement assets will go in providing an income. In deciding which class of mutual fund shares to choose during retirement, it requires a thorough understanding of how each of them works.

How to Choose a Mutual Fund Class for Your Retirement Needs

Each of the share classes generates sales charges or fund expenses; however, one class may be more advantageous than another depending on your investment objectives and the length of your holding period.

Class A Shares

Class A shares typically charge a front-end load or sales load. A fund with a 5% sales load would deduct $1,000 from an initial investment of $20,000. Many Class A shares offer breakpoint discounts which will reduce the sales load for purchases over a certain dollar amount. Many Class A funds will also charge 12b-1fees, but they tend to be lower than 12b-1fees charged in Class B and C funds.

If your investment is large enough to qualify for the breakpoint discount, Class A shares may be your lowest cost option.

Class B Shares

 Class B shares charge a back-end sales load or contingent deferred sales charge (CDSC), which is paid when you sell the shares. There are no breakpoint discounts with Class B shares. With most Class B funds, the CDSC decreases over a five to eight-year time frame after which your shares will convert to Class A shares with no back-end load. Class B shares also charge 12b-1fees which can significantly increase the cost of your investment over time. However, when they eventually convert to Class A shares (after the CDSC period) the 12b-1fees may be reduced or eliminated.

Class B shares with a low expense ratio may be your best choice for smaller investments if you plan on holding your shares for a long period of time.

Class C shares

Class C shares charge a deferred sales load but it is usually lower than Class B shares. The 12b-1fees tend to be higher with Class C shares and because they don’t convert to Class A shares, the higher expenses can last much longer. Also, Class C shares usually don’t offer any breakpoint discounts.

Although they don’t charge a sales load and the CDSC fund is usually less than Class B shares, Class C shares can be more expensive over time depending on the size of it 12b-1 fees.

Conclusion

The best share class to invest in for retirement may depend on how you make your investment decisions. If you work with a broker, he or she will likely recommend a Class A, B, or C mutual fund because the sales load is their compensation. If your investment is large enough to qualify for a breakpoint discount, your broker may recommend Class A shares because they are the least expensive for a long-term holding. If you work with an independent financial advisor, he may be able to have the sales load waived on Class A shares. This would be your best option because Class A shares also tend to have the lowest expense ratios.

If you are a do-it-yourself investor, your best option may be to choose a no-load fund. Pure no-load funds don’t charge a front-end load, nor do they charge a CDSC or 12b-1 fees. With a no-load fund, it is easier to compare actual expenses because the expense ratio is more inclusive of all expenses. No-load funds can be purchased directly from a mutual fund company which eliminates the need for sales charges.

Before making any mutual fund purchase, it is important to compare all of the fees and expenses of the different share Classes to determine how one type might perform over another. The most important consideration in any investment decision is how well the investment matches your specific objectives and time frame.


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