Types of Mutual Funds

Types of mutual funds are not the same as classifications, styles, or categories of mutual funds. So, what are types of mutual funds? Types of mutual funds are classified by the fee structure of the mutual funds. This is not to be confused with the categories of mutual funds products or styles of mutual funds products. For our mutual fund research guide purposes, we define types of mutual funds by their share classes.

What types of mutual funds are there?

Mutual funds come in four main categories:

• A share mutual funds
• B share mutual funds
• C share mutual funds
• D share mutual funds (different mutual funds companies can assign different names to this class of mutual funds but the basic features are similar)

A share mutual funds

A share mutual funds are those mutual funds with front end load. The front end load can be anywhere from 2% to 8%.

B share mutual funds

B share mutual funds are those mutual funds with back end load. B share mutual funds usually have back end load schedule, called CDSC charges (contingent deferred sales charges) schedule. For example, a mutual fund with 5 years CDSC charges can have a 5-4-3-2-1 back end load schedule as follows:

First year : 5%

This means if the mutual fund investor wants to redeem the back end load mutual fund within the first year of owning the mutual fund, the investor will have to pay the mutual fund company 5% of current value of the investment. This is heavy penalty for some mutual fund investors. Many mutual fund investors end up not redeeming the back end mutual fund and wait until there is no longer any penalty. This causes two distinct problems. Firstly, the mutual fund investor is holding onto a mutual fund that will not help him/her reach his/her investment goals. The mutual fund could be a poor performing mutual fund which the mutual fund investor is forced to choose between poor performance or heavy penalty.

Second year: 4%

If the mutual fund investor wants to redeem the mutual fund in the second year of ownership, the mutual fund investor will have to pay the mutual fund company 4% of current investment value at redemption. Many mutual fund investors get stuck with unsuitable mutual funds by trying to avoid this redemption penalty.

Third year : 3%

This means if the mutual fund investor wants to redeem the mutual fund in the third year, the investor will pay 3% to the mutual fund company.

Fourth year : 2%

If the mutual fund investor wants to redeem the mutual fund in the fourth year, the investor will pay 2% of the investment value to the mutual fund company.

Fifth year : 1%

If the mutual fund investor wants to redeem the mutual fund in the fifth year, the investor will pay 1% of the investment value to the mutual fund company.

After holding the mutual fund for 5 years, there is no penalty for redeeming. Many investors are holding onto unsuitable mutual funds and underperforming mutual funds in fear of paying this penalty. However, from your mutual fund research, if the mutual fund you have is underperforming its peer and index, you might want to consider paying the penalty to get into better mutual funds.

Click here to read about C share mutual funds and D share mutual funds.