When choosing a mutual fund, be sure to consider the options on payment

STAYING AHEAD

September 05, 1994|By JANE BRYANT QUINN

NEW YORK -- If you buy your mutual funds through a stockbroker or financial planner, you may have two tough decisions to make. First, is the recommended fund really what you want? And second -- a new challenge -- which of two or three methods of payment should you choose? How you pay will affect how much you ultimately earn.

Some brokers and planners tell you how much you're paying and explain the options. Others don't. Some may arbitrarily choose a payment method for you.

There's a fee table in the prospectus. But new investors may not know it or may not be able to interpret what they read. Those who pay no upfront commission may erroneously believe that they're buying "no loads" (meaning funds with no sales charge at all).

Many firms make matters worse in the way they handle the confirmation statements that are sent to investors after they buy. If the confirmation includes a box labeled "commissions charged," the brokerage firm can legally leave it blank -- implying that you paid nothing at all.

The staff of the Securities and Exchange Commission has put out, for comment, a suggestion that upfront charges be shown on confirmation statements. The industry has objected and the matter is pending.

When you buy a fund from a sales agent today, the odds are you'll be offered at least two different ways of paying, and perhaps three. Each way creates a different type of share with different investment outcomes. The mutual funds label these shares with letters of the alphabet, although-- adding to the confusion -- different funds use these letters to mean different things. Roughly speaking, here are your choices:

* 1. Class A shares -- an upfront sales charge, typically 2.5 percent to 5.5 percent, but sometimes as much as 8.5 percent. This cost is usually reduced for large purchases ($50,000 to $100,000 or more), if you agree to invest the money in a single year. Investors may also pay an annual 12b-1 charge (a percentage of assets deducted from your fund account), but it's usually low -- in the 0.25 to 0.3 percent range, Justine Phoenix, director of operations for the Investment Company Institute, told my associate, Amy Eskind.

* 2. Class B shares -- no upfront sales load, but an exit fee if you sell shares within a certain number of years. Typically, the exit fee starts at around 5 percent, then drops 1 percentage point for every year or two you remain invested. There's also an annual 12b-1, typically around 0.75 percent. After six or eight years, you may be switched into A shares, to reduce the 12b-1 cost.

* 3. Class C shares (which some funds call Class B or D) -- an annual 12b-1 charge, generally 1 percent, known as a "level load." It runs for as long as you hold the shares; you won't be switched into Class A. There may be a fee if you sell in the first year.

* 4. Class D shares (which some funds call Class C) -- a hybrid level load. There's a small upfront charge (usually 1 percent to 2 percent) and up to 1 percent a year in 12b-1 fees, which may decline after a certain number of years.

Which one should you choose? Here's how the classes generally stack up, according to David Bruce, president of Money Marketing, Inc., in Brooklyn, N.Y.:

Buy C shares if you plan to hold for just a few years. But no long-term investor should pay big 12b-1 fees indefinitely. So buy B shares IF you'll hold for four to six years or longer (depending on the fund) AND IF the B's then convert to A's. Buy A shares if you'll hold for many years and are making a large enough investment to reduce the upfront commission.

Bruce has a software program, for DOS and Windows formats, that helps customers decide the best payment method for individual funds. It costs $79.95; call 718-769-4017. A good broker or planner can do this calculation for you free. But why pay sales charges at all?, asks financial adviser Frank A. Jones of Memphis, Tenn. A pure no-load fund, bought directly from the fund's sponsor, levies no front- or back-end charges.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.

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