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Answer:
Dear
BuyandHolder,
Good
question! Here are the ABC's of the situation. It's
all a matter of understanding the terminology and
having a sense for how long you might hold your shares.
Many
funds have what is known as a load or a commission.
Loads
can be either front-end or deferred.
In some cases, there may also be a 12b-1 fee -- also
known as a marketing fee. The 12b-1 fee for
Class 'B' shares is significantly higher then for
Class A shares which can often lead to an overall
lower yield. The highest a load or commission can
be is 8.5%.
When
the commission is actually charged to the investor
is determined by the class of fund shares being purchased.
Different classes have their loads or commissions
structured and applied in different ways. That's why
it's important to read the fine print in the descriptive
material about the fund.
Class
A shares have a front-end commission. In other
words, you pay the commission when you purchase shares
-- at the "front" or beginning of the investment process.
A portion of what you pay for your shares is not invested...it
goes toward the commission -- just as when you purchase
stocks.
Sometimes,
with some funds, you can get a break on the front-end
commission. The three most common scenarios are: (1)
if you buy a large number of shares; (2) if
you already own other funds in the same fund family
or (3) if you sign up to buy shares on a regular
basis, typically once a month.
Class
B shares do not have a commission when you purchase
them but they do have a back-end charge. Also note,
they have higher 12b-1 feed which can reduce the overall
yield of the investment. In other words, you pay at
the end of the process -- when you sell your shares.
In most cases, the amount of the back-end charge declines
over time with it eventually eliminated entirely.
So, the longer you hold Class B shares the better.
Usually
(but not always), when the charge is eliminated, Class
B shares convert to Class A. You then receive regular
Class A shares at Net Asset Value (NAV) at no additional
commission.
When
you purchase Class B shares, all of your dollars are
invested and immediately go to work for you. However,
your expenses might be higher than with Class A shares,
especially if you sell before the sales charge is
eliminated.
Class
C shares have no up front sales fee. But they
do have a charge if you sell soon after purchase,
usually within a year. Class C shares do not convert
into A shares.
$TIP:
Because determining which class is best can be quite
confusing, the Securities & Exchange Commission has
created a Mutual Fund Cost Calculator, now
available to the public. I urge you to take time to
use it. You'll find it at:
http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm
Note:
Although the SEC web site has an explanation of
the various mutual fund classes and fees, I found
the material on the National Association of Security
Dealers' site easier to read, considerably more detailed
and enhanced with several clear examples. Go to: www.nasd.com.
On the home page, click on "Investor Information,"
then on "Mutual Funds" and finally on "Understanding
Mutual Fund Classes."
Good
luck!
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