10 things you need to know about Class A share mutual funds

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Included in this list are some cold hard facts about Class A shares, along with some tactics you really need to watch out for when purchasing an A share mutual fund.

I feel like I need a drum roll here for my first Top Ten list, a la David Letterman.

10 things you need to know about Class A share mutual funds:

1. Class A shares typically charge a front end sales charge, also referred to as a load. The upfront charge you have to pay varies. It all depends on the amount you plan to start with.
   • The more you plan on investing, with the fund family, the lesser they are going to charge you. Like any other business the fund families want to give you an incentive for investing large sums of money with them.
2. Class A shares have breakpoints. Like I mentioned in the previous paragraph, the more you invest, the lesser a percentage they will charge you. Once you hit a certain dollar amount, or breakpoint, the percentage fee that you’re charged drops.
   

   Sample Breakpoint Schedule
   Class A Shares (Front-end Sales Load)
   Investment Amount	Sales Load
   Less than $25,000	5.0%
   $25,000 but less than $50,000	4.25%
   $50,000 but less than $100,000	3.75%
   $100,000 but less than $250,000	3.25%
   $250,000 but less than $500,000	2.75%
   $500,000 but less than $1 million	2.0%
   $1 million or more	0.0%

3. Class A shares are purchased through a financial advisor, or broker, and the upfront sales load you paid, to get into the fund, will go directly to him (or her).
   • For example, lets say a mutual fund charges a load of 5%, if you invest less than $25,000. This means if you plan to invest $20,000, you’ll pay a $1000 load to the advisor and start with $24,000 in the fund.
4. Be sure to work with financial advisors who are cognizant of breakpoints and who bring them to your attention. Often a small difference in the amount you are going to invest can result in breakpoint discounts.
   • For example, using the above breakpoint, if you invested $24,000, you would be charged $1200. If the same fund charges 4.5% for any investment over $25,000, then an investment of $26,000 would cost you $1170, saving you $30. This may not seem like that much, but when the numbers get bigger the breakpoints create big discounts.
5. Be suspicious of an advisor that never brings up the issue of breakpoints. The commission he makes is directly tied into the load that you pay. Not making you aware of a looming breakpoint will result in a bigger payday for him.
6. Be suspicious of an advisor that tries to spread out your monies between different fund families. Fund breakpoints ONLY pertain to monies invested in the same fund family.
   • For example, let’s say Tom Plumtree inherited $140,000 and wants to invest it in mutual funds. Let’s compare what it would cost him to keep it all in the same fund family vs. spreading it out among 4 different fund families.
   • By keeping it all in one fund family, spread out in to 4 different funds, Tom has crossed over the $100,000 breakpoint, where he is charged 3.25% on his initial investment. This will cost Tom $4550. Tom’s starting investment is $135,450.
   • If Tom were to spread out his $140,000 investment (or was talked into spreading it out) among 4 DIFFERENT fund families, investing $35,000 in each family, he would fall between the $25,000-$50,000 breakpoint. This would cost him 4.25% or $5950. Tom’s starting investment is $134,050.
   • The overall difference in cost here is $1400, which is pocketed by the advisor. Sometimes a decison like this can be justified, but it better be a damn good reason. For the most part, be wary of a recommendation to spread money between different fund families. At the least, get a second opinion.
7. Class A shares have rights of accumulation- you (or your spouse or children) may be entitled to a discount on your current mutual fund purchase by combining your current and previous fund transactions to reach a breakpoint.
8. Most Class A shares accept letters of intent (LOI). If you plan on investing more money in the future, into the same fund family, then you would qualify for a reduced up front charge on the current purchase.
   • All you need to do is state your intentions in this letter (LOI), keep it on file, and it will be applied against all future purchases. This works well if you plan on making systematic investments (i.e. monthly purchases). But be careful, if you fail to invest the amount you stated in the LOI, the fund can retroactively collect the higher fee.
9. Although Class A shares charge an upfront load and decrease your starting investment, the annual operating expenses are lower than those of B and C share funds. Over the longterm, because of the reduced expense ratios, studies show A shares to outperform both B and C shares.
   • I think the logic there is a bit idealistic when applied to the real world. The average mutual fund is held for approximately 3 years and today investors and advisors alike put a premium on flexibility. If you’d like to read up further on this debate, here’s an interesting article debating the performance of the different share classes.
10. I’ll end with this. Here’s an excellent mutual fund expense analyzer that’s easy to use and serves up relevant information about the expenses associated with a mutual fund or ETF of your choosing. I like it so much that I’m going to include it in the next 2 posts as well.

That’s all for now folks. Moving on to 10 things you need to know about Class B share mutual funds.

Tags: Class A Share Mutual Fund, Mutual Funds, Psychology Behind Financial Planning