First off, I want to make it clear that I’m not a fan of mutual funds that charge a load. That said, I still wanted to do a post to show you how different mutual fund classes affect your portfolio. NOTE: this illustration only affects those of you who have purchased load mutual funds (most likely through an advisor). Before I show you the comparison, I want to explain the differences in the three main classes of load mutual funds:
A-Shares – Charge an upfront load (the maximum is usually around 5 – 5.50%) and managment expenses each year.
B-Shares – Do not charge an upfront load but increase the annual management expenses for the first several years in order to compensate themselves for the loss of the front load. B-Shares also have a contigent deferred sales charge (CDSC) that is charged to client should they sell their mutual fund during the CDSC period (usually 5-6 years). The CDSC usually starts out at 5% and declines 1% each year until it is no longer charged. For example, the CDSC could be charge like this:
YEAR 6….NO CDSC CHARGE
If you are a long-term investor, the CDSC most likely will not affect you. However, there’s always the possibility that you will want to get out a fund before the CDSC ends. In that case, you will be charged based on how long you have owned the fund. Love ’em or hate ’em, the CDSC is a good way to rid clients of the short-term mentality.
C-Shares – No upfront sales charge but have higher management expenses (usually .75% per year) for as long as the client owns the mutual fund. C-Shares also have a 1.00% CDSC during the first year. Over the long-term, C-Shares are the most expensive mutual fund share class. This DOES NOT make them a bad choice. In fact, I like C-Shares because it gives the advisor an incentive to work for you since their income is based on your account value.
Now, how do these different share classes impact a portfolio? Take a look at the table below that I put together using information gathered from the prospectus (PDF) for the AIM Leisure Fund (I’m NOT recommending this fund. I just needed a real-life fund to use as an example):
In this case, the A-Share turns out to be the cheaper fund after the 5th year. The reason for this is that the additional management fees are being charged every year and have a cumulative effect. Interesting stuff isn’t it? Thoughts?