Mutual funds normally have at least 2 classes (A and B). It has something to do with maintance fees and such. Can someone explain what the diffrence is and which one would be better for long term (20+yrs) and short term (5-10 yrs)?
I think that class A funds have the fee upfront when they are purchased. Class B fees are charged when they are sold. I don’t know which is best.
Read the prospectus (fine print) and it will detail exactly what the terms are. Definitions on what is considered class A and B may vary between funds. Could be a minimum investment amount, with lower commission for higher amounts, how often they can be traded, etc.
What China said. In my limited experience, multiple classes imply a high fee structure. Usually.
You may want to consider a no-load fund, or one with low expense ratios.
The fact that the fund has different classes suggests you’re buying a loaded fund. By doing a little research (Morningstar is a good place to start) you can most likely find a no-load that mimics the fund you’re interested in.
Okay, maybe you’re in a 401(k) that only offers you loaded choices or you’re putting together an IRA with a relative who happens to be a broker. Fine.
China Guy is right to recommend you read the prospectus. How THEY make money should be clearly explained in the first few pages.
Traditionally the A shares charge the load (commission) up front and operate with smaller management fees. Then things get muddy depending on the fund family. The B shares may contain a back end load that diminishes each year. In most cases the B shares will have higher ongoing management fees and 12(b)-1 fees. An extra 1% a year may not look like much, but at the end of 5 years you’ve given up 5%. Some advisors have called these fees a “hidden load.” Therefore for long term holding the A shares are usually a better bet.
I am not a financial advisor and this should not be considered financial advice. Read the prospectus before investing any money.
I am a financial advisor and this should not be considered financial advice. However - you are usually better off with A shares. Think of B shares as financing your purchase of a product. You pay more over a long period of time. Almost never should one use C shares which are RARELY appropriate but often sold. They charge 1% annually forever. The costs can be three or four times A shares over ten or twenty years.
I bought a class B fund from Bank One several years ago. It was a 5 year fund, no maintenance fee, with a gradually decreasing penalty for early withdrawal - 5% in the first year, 4% in the second, and so on. After about 2 years, Bank One decided to tack on a $25 annual ‘holding fee’ which applied to accounts with no activity. Since stocks were in a downslide and I was on my way to a negative return with this fund, I was reluctant to buy or sell more shares. So I was basically stuck with this fee, which was part of the fine print in the prospectus. Feeling that Bank One had pulled a fast one, I closed my account and paid whatever early withdrawal fees were part of the original agreement. I was just glad to no longer be doing business with Bank One.
Moral - Understand the ENTIRE prospectus, fine print included, before investing in any mutual fund. Remember that the people in charge of managing banks and funds do so in their own best interest, not yours…regardless of their sales pitch.