Find load fund's multiple share classes confusing? Turns out so do the fund companies themselves. The New York Times examined a selection of prospectuses from several sales load-bearing mutual funds and found that sometimes the information about a fund's share classes printed in them was misleading or just plain wrong:
It’s hard enough to make sense of load funds’ expenses when the documents describing them are accurate. But an informal survey revealed surprising errors in prospectuses. Some arose when a fund company ignored the shift in the cost structure of a B share to that of an A share after a certain period. Other funds applied inaccurate back-end sales charges or misstated the amount that a brokerage firm receives to recommend the shares.
In some cases, prospectuses steered investors away from Class B or Class C shares, calling them more expensive, even though for the typical fund transaction — less than $50,000 invested for around four years — B and C shares can be cheapest.
Prospectus errors seemed to favor Class A shares. Consider an error in the statement of the Lord Abbett Affiliated Fund, dated March 1, 2008. In a table showing average annual returns for 1-, 5- and 10-year periods for all share classes, it assigned an annual return of 7.26 percent for A shares over 10 years, versus 7.2 percent for B shares.
But these figures overlook the B share compensation change in the eighth year, when its fees are the same as those of the A shares. According to the Finra calculator, a holder of B shares would wind up with slightly more in his account over 10 years than an A share investor. Using a 5 percent annual return on $10,000 invested, the calculator says an A share holder would have $14,162, versus $14,273 held by a B share investor.
So what's an investor to do? Simple: avoid load funds like the plague. There are thousands of low-cost, high quality no-load funds out there that have just one straightforward easy-to-assess retail share class.
Some Load Funds Don't Know Their ABCs
Find load fund's multiple share classes confusing? Turns out so do the fund companies themselves. The New York Times examined a selection of prospectuses from several sales load-bearing mutual funds and found that sometimes the information about a fund's share classes printed in them was misleading or just plain wrong:
It’s hard enough to make sense of load funds’ expenses when the documents describing them are accurate. But an informal survey revealed surprising errors in prospectuses. Some arose when a fund company ignored the shift in the cost structure of a B share to that of an A share after a certain period. Other funds applied inaccurate back-end sales charges or misstated the amount that a brokerage firm receives to recommend the shares.
In some cases, prospectuses steered investors away from Class B or Class C shares, calling them more expensive, even though for the typical fund transaction — less than $50,000 invested for around four years — B and C shares can be cheapest.
Prospectus errors seemed to favor Class A shares. Consider an error in the statement of the Lord Abbett Affiliated Fund, dated March 1, 2008. In a table showing average annual returns for 1-, 5- and 10-year periods for all share classes, it assigned an annual return of 7.26 percent for A shares over 10 years, versus 7.2 percent for B shares.
But these figures overlook the B share compensation change in the eighth year, when its fees are the same as those of the A shares. According to the Finra calculator, a holder of B shares would wind up with slightly more in his account over 10 years than an A share investor. Using a 5 percent annual return on $10,000 invested, the calculator says an A share holder would have $14,162, versus $14,273 held by a B share investor.
So what's an investor to do? Simple: avoid load funds like the plague. There are thousands of low-cost, high quality no-load funds out there that have just one straightforward easy-to-assess retail share class.
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