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.
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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