ABCs of fund investing can save you money


Time for a quiz.

Say you invest $10,000 in The Growth Fund of America, one of the country's most popular stock mutual funds, and the fund returns an average of 8 percent a year compounded before all sales charges and expenses.

After 20 years, you will have: (a) $40,780 (b) $40,746 or (c) $39,860?

The correct answer is any of the above, depending on which share class of the fund you buy. The answer will be (a) for the "A" shares, (b) for the "B" shares and (c) for the "C" shares.

Confused? Dozens of letters and e-mails I regularly get from readers show many fail to grasp the distinction between fund share classes.

Now, thanks to two free online tools from industry regulators, investors can make better-informed choices. Picking the right fund share class can save you hundreds if not thousands of dollars.

When a fund has multiple share classes, they all have the same manager investing in the same portfolio. The only difference is the charges and expenses investors pay. Broker-sold funds often come in "A," "B" and "C" shares that represent different ways to compensate the broker.

As a rule, "A" shares charge a front-end commission, or load, expressed as a percentage of the sales price. That percentage tends to decline gradually for investments exceeding "breakpoints" that often start at $25,000 to $50,000.

"B" shares do not charge upfront commissions but impose a declining "back-end load" if you sell before a set number of years, such as six. They charge higher annual expenses than "A" shares for a number of years, then convert to "A" shares.

"C," or "level-load" shares do not charge upfront commissions and usually levy a small back-end load only if you sell within a year. But "C" shares impose higher expenses that can make them the costlier option over time (the Growth Fund of America "C" shares are actually among the least expensive in the industry). Also, "B" and "C" shares do not offer breakpoint discounts for large investments.

As a result, among broker-sold funds, the "A" shares as a rule are the most appropriate choice for long-term investors, and more so if they qualify for discounts.

But in many recent cases, regulators have found that investors were inappropriately steered into higher-commission-producing "B" or "C" shares. These shares were misleadingly promoted as "no-load" because they didn't charge an upfront commission. In addition, many investors in "A" shares eligible for discounts did not receive them.

"It's crucial that investors evaluate the impact of fees and expenses on their mutual fund investments, because those fees and expenses will reduce their returns," said Robert Glauber, chairman and chief executive of NASD, formerly known as the National Association of Securities Dealers, which regulates the brokerage industry. "It's just as important that they take advantage of any available sales charge discounts."

To that end, the NASD has unveiled two online tools, an enhanced "mutual fund expense analyzer" and a new "mutual fund breakpoint search tool." Both can be found on the Web site.

I used the expense analyzer to come up with the hypothetical numbers for the Growth Fund of America. This vastly improved tool replaces a version that required users to manually enter data.

Now all you have to do is enter a fund ticker symbol or select a fund family, fund or share class from a drop-down menu. The expense analyzer incorporates information from a database covering virtually all the more than 18,000 mutual funds and exchange-traded funds in the United States.

The expense analyzer can estimate and create a graph of a fund's value for any holding period, with a running total of expenses the investor would pay. It can compare the expenses of up to three exchange-traded funds, mutual funds or share classes of the same fund at the same time. And it provides extensive information about a fund.

The breakpoint search tool allows users to look up information on a fund's breakpoint schedule and whether other waivers of sales charges are available.

This particular tool was created in response to the recommendations of a task force convened by NASD at the request of the Securities and Exchange Commission in 2003. The task force was formed after regulators determined many investors were not receiving the breakpoint discounts to which they were entitled. To date, more than $130 million has been paid in restitution to these investors.

Humberto Cruz writes for Tribune Media Services.

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