Before you buy a load fund, know your ABCs and costs

PERSONAL FINANCE

April 13, 2003|By EILEEN AMBROSE

IF YOU'RE buying a mutual fund through a broker, it pays to know your ABCs.

In this case, the alphabet designates the class of shares you're purchasing. You'll generally find different share classes in funds that carry loads, or sales charges.

While a mutual fund's investments and money manager are the same no matter the class of shares, each class has its own expenses and sales charges that go toward compensating brokers or financial advisers for their guidance.

It's the investment professional's duty to advise investors on the class of shares best suited for them, factoring in the amount being invested and how long the shares will be held. Still, investors should pay attention because being in the wrong class of shares can cost them money.

Securities regulators are looking at share classes these days, too.

Last month, regulators reported that nearly one-third of fund transactions at 43 brokerages failed to give commission discounts due on Class A shares, resulting in those investors being overcharged an average of $364 per transaction.

And The Wall Street Journal recently reported that regulators were looking at whether investment firm Morgan Stanley inappropriately recommended Class B shares to customers, a potentially more expensive option for long-term investors.

Officials with the Securities and Exchange Commission and National Association of Securities Dealers won't say if there's an investigation. Morgan Stanley spokesman Bret Gallaway also declined to comment but noted Class B shares "are entirely appropriate for many investors."

Many financial experts advise investors to stick with no-load funds that can be purchased directly without an adviser, thus avoiding potentially hefty sales charges. But after three years of a down market, many investors are seeking professional advice and could end up facing the question of what class of shares to buy in a load fund.

"If you're buying through a broker or planner working on commission, you will pay the load no matter what," said Eric Tyson, author of Mutual Funds for Dummies. "That's the way the broker gets compensated."

Investors can control whether they pay a sales charge up front, on the back end or through higher annual fees, depending on the class of shares purchased. Funds might designate classes by various names and letters, but the standard classifications are A, B and C.

With Class A shares, investors pay an upfront sales charge, often around 5.75 percent. They also may pay an annual fee, about 0.25 percent of assets, for marketing and distribution.

If you invest a sizable sum in Class A shares, you could be eligible for a discount on the upfront sales charge. If you invest, say, $25,000, the upfront charge might drop from 5.75 percent to 5.5 percent. The sales charge could be reduced further or even eliminated for larger purchases.

Class B shares don't have upfront sales charges, but investors pay a higher annual fee. They also will owe a back-end sales charge if they bail out of the fund within a few years. This charge usually decreases the longer you own shares until it disappears. For instance, the charge may be 5 percent the first year and drop one percentage point each year until it's gone.

A couple of years after the back-end charge disappears, Class B shares often are converted to Class A shares with the lower annual fee, experts said.

Like B shares, Class C shares don't have an upfront charge and investors pay a higher annual fee than with A shares. They may also have a fee, about 1 percent, if shares are sold in the first year or two. Unlike B shares, C shares don't convert to A shares, so investors will pay the higher annual fee throughout the time they hold the shares.

Which class is best for you? Ask your broker or financial adviser, but also read the mutual fund prospectus for share class explanations and their costs, experts said.

"The best method is to put pen to paper and see which one is a better deal given your time horizon. In most all cases, the A shares tend to be the best," said Bradley Sweeney, an analyst with Morningstar Inc.

"Shop around ,just like any good consumer," said Robert Mewshaw, president of Van Sant & Mewshaw Inc., an investment adviser.

"If you go to a car dealership, do you say, 'Hey, I want to buy a car and can you put me into whatever you think is best?' " Mewshaw said. "Think of yourself as a consumer first and investor second. Think about 'What is the cost to me?' "

Ultimately, expenses and sales charges can have a significant impact on a fund's return, and it's one area that investors have control over, said Mewshaw, who favors no-load funds because of their lower costs.

There's online help, too, from the SEC at www.sec.gov and NASD at www.nasd.com. Both offer calculators that allow you to compare expenses among different funds and classes and see how these costs affect investment returns over time.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose-@baltsun.com.

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