Q – I recently came into some money through an inheritance, and I’ve been looking at mutual funds, because I’ve been told these offer the most investment diversification. But I’m finding the assortment of fund series – everything from A to I and beyond – baffling, and I’m totally flummoxed by the hodge-podge of sales charges and commissions. Can you sort this out for me? – Stan B., Belleville, Ontario
A – The choice of mutual fund investments can be complex and completely overwhelming. There are very nearly 36,000 investment fund products (including clones) on the market. These include not only money market funds, equity mutual funds, and fixed-income funds, but also a host of exchange-traded funds (ETFs). There are income funds, balanced funds, international funds, high-risk, and low-risk funds.
A great many mutual funds come in different series of the same fund, some with higher or lower fees, trailing commissions, some with loads, some no-load. The series are indicated by letter, and the whole alphabet soup can quickly become pretty baffling. Here’s a summary of the most common series of mutual funds (these distinctions do not apply to ETFs).
Mutual fund alphabet soup
A Series funds. These are the most commonly sold mutual fund units. Typically they have several sales-charge options. However, because they also offer commissions or trailing commissions to advisors and firms selling this series, MERs tend to be a little higher than some of the other series.
D Series funds. These also tend to be very popular with do-it-yourself investors who purchase funds directly from the company or through discount brokers. Trailing commissions are typically low, which tend to bring down the MER for funds in this series.
F Series funds. This series is sold only by advisors, and you negotiate the fee directly with your advisor. Because you pay the advisor a fee directly, the advisor does not get a commission from the fund company. Your fund fees might be built into the annual fee you pay your advisor based on a percentage of assets under management or they might be part of a fee-for-service plan. Either way, MERs for F series funds are typically lower than for A series or D series funds.
I Series funds. These funds are usually sold to high net worth investors (the definition varies, but often those with $500,000 or more to invest), and to pension funds and other institutional investors. For some obscure reason, these funds are also sometimes referred to as "O" Series.
Sometimes, fund companies will create other series of funds for special circumstances involving fund mergers and reorganizations, for example. Only investors directly involved in these situations, mostly existing unitholders, will have access to these funds.
Sorting out sales charges
Sales charges, or “loads,” can also become confusing. These are the charges you pay when you buy or sell a fund, and are prescribed by the mutual fund company. Keep in mind that sales charges are not the same as the management expense ratio (MER), which are basically the operating and management fees charged to the fund, expressed as a percentage of assets. You don't pay these directly – the fund does, but they do affect the fund's return. But here’s a summary of the basic types of sales charges that you do pay directly.
No-load funds. These funds do not charge you a fee when you buy or sell units. Fund companies that sell direct to the investor will frequently offer no-load funds.
Front-end load funds. A front-end load is a fee is charged when you purchase a fund (that is, at the “front end”), and is paid directly to the advisor or firm that sells you the fund. Loads can be as high as 5%, but are usually negotiable depending on the arrangement you have with the advisor and the size of your investment.
Deferred sales charge. The DSC, or back-end load, is a fee charged when you sell the fund, and it can be high, as much as 6%. Frequently, the DSC is offered on a declining basis, so that the longer you hold the fund, the lower the fee when you eventually redeem your units. If you hold for the full term, you may pay no charge at all; however, you are locked into the fund, typically for a period of five to seven years. Avoid DSC funds, as they are very costly and severely reduce your investment flexibility.
Low load funds. These funds will levy a sales charge when you buy and another when you redeem. The fee can be as much as 3% at each end, with a minimum holding period before you sell, typically three years. It’s a version of the DSC fund, so avoid it.
The wide variety of mutual fund series and charges can soon flummox even the most seasoned investor. ETFs have gained in popularity is not only because their MERs are much lower than most mutual funds but also because the only sales charge you’ll pay is the trading commission charged by your broker when you buy or sell the ETF.
To help you sort out mutual fund series, commissions, and loads, consult an qualified independent financial advisor, one who isn’t tied to the specific mutual fund products of a handful of companies. If in doubt, ask. Advisors are obliged to disclose their relationships and should be totally up-front about who pays them what and how. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 647-352-5735, or by email at firstname.lastname@example.org for a confidential planning consultation. Follow Robyn on Twitter and Facebook.
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