Mutual Fund ABC's - Five Classes - Which Is Right For You?

Mutual funds can be a great investment, but you should know what types you are investing in... before you invest. Some people call them alphabet soup because over the years, mutual fund companies have added new classes in an effort to help commissioned sales representatives overcome objections. After you finish this article, you will be able to find the best class of funds for your specific situation.

First lets outline each of the classes that mutual fund companies are presently offering to the public. There are five main classifications. They are No-Load, A Class, B Class, C Class and Adviser Class funds. Each has its own unique structure, but their internal investments are identical for each class. Some fund families offer all five of these classes, while others specialize in just one or two.

Five Fund Classes:

No-Loads: This class of funds is not widely advertised, but can be the lowest cost group to work with. There are no commissions paid to anyone for your investment in these funds. That means that if you invest $10,000, your entire $10,000 goes directly toward purchasing shares of the fund. Many No-Load fund companies only offer the no load classification because they work exclusively with investment advisers or directly with the public. No-load funds also tend to keep their annual expense charges lower than the majority of the other classes.

A-Class: These funds charge an up-front sales commission. This means that if the fund charges a 5% commission and you invest $10,000, you are charged $500 up front and $9,500 is then used to purchase shares of the fund. This $500 is used to pay a commission to the sales representative. These funds also carry a lower annual expense charge than their B and C class siblings.

B-Class: This class of funds does not charge any up-front commissions, but does charge a back-end redemption fee if you liquidate your investment before a certain time frame, usually 4 to 8 years. They also charge a higher annual expense charge which will negatively impact the annual return on your investment. They do pay commissions to the sales representative which are taken from the higher annual expenses and the back-end redemption fees.

C-Class: These funds carry the highest annual expenses charges of any of the classes. They are usually double or more what you would pay on their A class funds. While there are no up-front or back-end commissions, an annual commission is paid to the sales representative which is taken from the higher expense charges and will also have a larger negative impact on your annual return on the investment.

Adviser Class: The adviser class of funds can be a hybrid of one or more of the above mentioned groups. Make sure that you ask specifically how you are paying for the adviser's service and how it will affect your net invested amount and investment returns. These were established to compensate certain advisers that wanted to offer a no-load fund but be paid by the fund company instead of their client for their efforts. They usually involve some commissions and also a higher annual expense charge.

Summary: Watch out for sales people who tell you there are no costs to work with their funds. If they are using A, B, C or Adviser funds, you are paying a commission for their services. They are being paid directly by the companies that they represent, which can create a conflict of interest and cause them to be somewhat biased.

If they are using a No-Load funds, you are probably working with a Registered Investment Adviser and will pay a management fee. While these fees are substantially lower and tax-deductible, their advice and fees are generally provided over a longer period and provide for on going services. Either way make sure you realize that there are "no free lunches" and you are going to pay something for quality investment advice.

To discover additional investment, financial and income tax strategies, check out my blog or download your FREE Wealth Expansion Kit by clicking here. The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses.

About the Author:

Keith Maderer is a financial expert and has been a investment and tax adviser in the Western New York area for over 30 years. He is the owner of SENIOR Financial and Tax Associates and the founder of the Maderer Foundation, a private scholarship program.

Keith is also the author of "How To Get Your College Education For Less". Available on Amazon.com - ISBN No: 978-1-4538-2053-7.

You can get your FREE Wealth Expansion Kit, or check out his blog by visiting http://www.sftaweb.com/

Mutual Funds: Open-Ended Or Closed End - Which Is Best For You?

When you begin looking at investing, mutual funds will probably go to the top of your list. They are professionally managed, diversified, liquid and a great way to accumulate wealth. You will also notice that there are open-ended and closed end funds that you can purchase. What is the difference and which is better for you?

In order to properly compare these two investments, you need to understand the similarities as well as the differences. After you make your comparison, one should stand out as distinctly better for your investment portfolio and your trading strategy.

Open Ended Funds: Mutual funds are classified as open-ended because they will continue to issue new shares on the fly as additional dollars are added to the fund. Open fund managers can continue to add new capital to their investment portfolio as it comes in, but also must redeem securities if liquidity demands require it.

Advantages: Open ended funds offer diversification, daily liquidity, professional management, service and convenience to all investors. They are also very easy to compare with other investments because of their standardization of return and risk calculations along with their government oversight and regulation.

Disadvantages: Some of the concern with mutual funds are their various fee and commission structures along with less control over the timing and recognition of capital gains which can affect their income tax efficiency. They are also only priced and valued once each day at the end of trading, which provides less market timing and trading flexibility.

Closed Ended Funds: Closed-ended funds are unique in that after they begin operating, they are closed to new capital. They do not issue new shares, nor do they redeem securities when someone buys or sells their shares. They continue to trade only with the capital that they originally raised.

Advantages: Closed funds don't have to deal with the added expense of continually creating or redeeming new shares, which allows them to keep less cash in their portfolio. They also don't need to worry about market fluctuations because they won't need to sell anything if someone wants to redeem shares. Closed shares are traded all day long just like a stock, which allows for greater timing and trading flexibility.

Disadvantages: In order to purchase or sell closed funds, you must pay a commission on each trade, similar to stock trades. As for liquidity concerns, you need both a buyer and willing seller to execute a transaction. If market conditions are extremely volatile, their may not be any buyers or available sellers. Closed funds also sell at premium or a discount depending on market conditions and investor perceptions. This could be create an opportunity or a dilemma depending on which side of the trade you are on.

Summary: As with any investment vehicle, there are risks associated with them. For the majority of investors, open-ended funds will provide an easier, more effective way to systematically accumulate wealth. If you use no-load mutual funds, you can buy and sell regularly without commissions or transaction fees and use systematic investment programs to continually add to your positions.

But if you are familiar with buying a closed portfolio and are comfortable with transaction fees, premiums and discounts, there are some great closed end funds available. For a knowledgeable investor, increased profits can be made with a sound trading strategy and a good gut instinct.

To discover additional investment, financial and income tax strategies, check out my blog or download your FREE Wealth Expansion Kit by clicking here. The first step to creating wealth is knowing where you are and then charting a path that will enhance your financial strengths and correct your weaknesses.

About the Author:

Keith Maderer is a financial expert and has been a investment and tax adviser in the Western New York area for over 30 years. He is the owner of SENIOR Financial and Tax Associates and the founder of the Maderer Foundation, a private scholarship program.

Keith is also the author of "How To Get Your College Education For Less". Available on Amazon.com - ISBN No: 978-1-4538-2053-7.

You can get your FREE Wealth Expansion Kit, or check out his blog by visiting http://www.sftaweb.com/