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The ABCs of Actively-Managed Mutual Funds – Part Two

The ABCs of Actively-Managed Mutual Funds
Terry Riffle
Managing Principal
Paramount Capital Advisors, LLC

Continued from the March issue of the Senior Forum

Class A shares of actively-managed mutual funds involve an initial sales charge. This sales charge is typically 5.75% for amounts invested under $25,000 and decreases for larger investments. These different levels are called breakpoints. For example, the sales charge for a $100,000 investment in mutual funds is usually 3.50%. Furthermore, Class A shares have the lowest annual fund operating expenses of the different share classes. The average equity mutual fund has annual expenses of approximately 1.20% to 1.30%.
Over a long time period, Class A shares are the least expensive share class of actively- managed mutual funds to own.

Although Class B shares do not involve an initial sales charge, they do have much higher
annual expenses. Essentially, an investor is financing the sales charge over time in the form of higher annual expenses if he purchases Class B shares. After the contingent deferred sales charge (CDSC) has ended, Class B shares will convert to Class A shares. At that point (usually in the beginning of the eighth year), the shareholder will be subject to the lower annual expenses. It is noteworthy that some mutual fund companies stopped offering Class B shares a number of years ago since they are simply not a very good deal for investors.

As I indicated in my last article, Class C shares do not have an initial sales charge, but they do involve a CDSC for one year. The CDSC is 1%. This means that if someone invested $100,000 in Class C shares of a mutual fund and then withdrew his money within the first year, he would be subject to a $1,000 penalty. Since this penalty is much lower than the first year penalty of Class B shares (typically 5%), an investor may think that this share class offers the best value. However, this is not necessarily the case.

Class C shares involve even higher annual expenses than Class B shares do. However, unlike Class B shares, Class C shares will never convert to Class A shares. Therefore, an investor will pay significantly higher annual expenses as long as he owns this share class of an actively-managed mutual fund. Over a long period of time, Class C shares are the most expensive share class to own because of their significantly higher annual expenses.

In my professional opinion, when it comes to investing in mutual funds, it is best to have no (share) class. No-load mutual funds, index funds, and exchange-traded funds (ETFs) offer much less expensive ways for an investor to gain exposure to the equity markets. If you would like to learn more about either the annual fund operating expenses of actively-managed mutual funds or the aforementioned investment options, please call Terry Riffle at (330) 915-6114.

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