Mutual Fund Class Warfare

Class A shares generally nail you at the door with a front-end sales charge. This front-end load, as it is often called, is taken right off the top and usually goes to the broker selling you the fund. So whatever percentage of your hard-earned inheritance you decide to put into Class A shares of a fund, a portion will not be invested.

For example, if you invest $100,000 in Class A shares with a 5% load, only $95,000 gets invested, while $5,000 goes to the broker or financial adviser who sold it to you.

If that same fund has a 2% annual expense ratio -- a mutual fund's expense ratio measures the fund's total annual expenses expressed as a percentage of the fund's net assets -- then the fund will cost you a total of $6,900 for the year in fees alone ($1,900 in expenses plus $5,000 for the front-end load). In order to make that back in the first year, the portfolio manager needs to return a minimum of 7.3%. That's not an easy feat.

So what's the upside on Class A shares if the vigorish is high and there's no difference in quality? Breakpoints.

A mutual fund may offer you discounts, called breakpoints, on Class A shares if you:

make a large purchase;

already hold other mutual funds offered by the same fund family; or

make a deal to regularly purchase the mutual fund's shares.

Finally, Class A shares may also charge 12b-1 fees, which are asset-based and pay the marketing costs of a fund. (Usually, the 12b-1 fees associated with A shares are lower than those charged in B and C shares. But more on those in a moment.)

There you have it folks, everything you ever wanted to know about Class A shares except the most important thing: When should you buy them?

Most financial advisers would probably recommend purchasing Class A shares only if the fund has an amazing track record (we're talking Willie Mays numbers here) and if you are investing enough bucks to hit a serious breakpoint. Otherwise, stick with a no-load fund.

Class B Shares

Class A shares charge you on the way in, Class B shares charge you on the way out. Class B shares are back-end loaded, or in SEC speak, the exit fee is termed a "Contingent Deferred Sales Charge." The SEC refers to it as a contingency-based fee because it is dependent on how long you hold the fund. The fee percentage will be higher if you redeem, or sell, the shares within the first couple of years, and slide down to zero by the sixth or seventh year.