In mutual fund investing, the old adage that high costs indicate quality couldn’t be further from the truth. There is no proof that if you pay a higher fee you’ll get a higher return. If anything, the mutual fund manager of a high-cost fund might take more risks in the attempt to produce a higher return — and, of course, this higher return is not a sure thing. So, if the manager’s risky moves don’t pan out, you’ve not only forked out more money in costs, but you’ve also seen your portfolio value shrink from capital losses.

To avoid paying high fees only to suffer losses, and to maximize your investment return, it is important to consider which class of mutual fund shares is suitable for you and to know what kind of fees you will be paying when you invest in a mutual fund. Here we give an overview of these different classes.

What Are Mutual Fund Classes?

While stock classes indicate the number of voting rights per share, mutual fund classes indicate the type and number of fees charged for the shares in a fund.

Although mutual fund companies can have as many as seven or more classes of shares for a particular fund, there are three main types of mutual fund classes that are most popular: A. B and C (also known as A-shares, B-shares and C-shares). Each of these classes has various benefits and consequences. Let’s examine each in turn.

Class-A Shares

Class-A shares charge a front-end load that is taken off your initial investment.

Pros

• Lower 12b-1 fees — Class A shares tend to have lower 12b-1 fees. so if you plan on holding these shares for several years, a front-end load might be beneficial in the long run.
• Breakpoints — These provide a discount off regular front-end load rates each time your investment reaches a certain amount in a series. If the first breakpoint is $25,000, you could invest that amount initially to receive the first discount. (To learn more, read Break Free Of Fees With Mutual Fund Breakpoints .)
• Right of Accumulation — This gives you the opportunity to receive a discount on the front-end load if you reach the first breakpoint with the second installment. So, again, say that the first breakpoint is $25,000 and your initial investment is $10,000. If you invest $15,000 to reach the breakpoint on the second installment, you’d receive a discounted front-load fee.
• Letter of Intent - Some companies also offer front-end load discounts up front to individuals who initially express their intent to invest an amount over a certain breakpoint by a certain point in time.

• High Initial Investment Required — Investors who do not have the funds to reach a breakpoint before the deadline indicated by a letter of intent will have to pay regular front-end fees.
• Long Time Horizon Required — These funds are not optimal for investors with a short time horizon. For example, say your initial investment is $4,750 after $250 in front-load fees, and your investment increases 3% during the course of a year. If you liquidate at the end of the year, you would have actually lost $107.50 [(4750*1.03)-5000], or 2.15%.

Class B Shares

These shares are classified by their back-end or contingent deferred sales charge. These shares are typically good for investors with little investment cash and a long investment horizon.

Pros

• No Front-End Fees — Your entire initial investment contribution earns interest income.
• Deferred Sales Charges — The longer you hold the shares, the lower your deferred sales charge.
• Conversion to Class A — Class B shares automatically convert to Class A shares after a certain period of time. This is beneficial because Class A shares have a lower yearly expense ratio than Class B shares (see below).

• Long Time Horizon Required — If you withdraw funds within a certain period of time (typically five to eight years) you are a charged a back-end or deferred sales charge .
• No Breakpoints — Class B shares do not provide breakpoints on the deferred sales charge, so regardless of how much you invest, there is no discount on these charges.
• Higher Expense Ratios — Class B shares charge higher expense ratios than both Class A and C shares, until shares are eligible to be converted to Class A.

Class C Shares

Class C shares are a type of level-load fund. This class works well for individuals who will be redeeming shares in the short term.

Pros

• No Front-End Fees — Your entire initial investment contribution earns interest income.
• Small Back-End Load — The back-end load is typically only 1%.
• Opportunity to Avoid back-End Load — The back-end load is normally removed after the shares have been held for one year.

Cons

• Back-End Load — A back-end load — although small — is typically charged if funds are withdrawn within the first year.
• Higher Expense Raios — Although the expense ratios of Class C shares are lower than those of Class B shares, they are higher than those for Class A shares.
• No Conversion — Unlike Class B shares, Class C shares cannot be converted into Class A shares, removing the opportunity for lower expense ratios. As such, if you have a long time horizon, Class C shares are not optimal for you as the high management fees are continuous. That is, your investment returns will be reduced the longer you stay invested because the fees will add up considerably over time.
• No Discounts — Class C shares do not offer discounts on expenses when the account reaches certain levels.

Applying the Pros and Cons

Let’s look at how the characteristics and pros and cons described above work in the following share classes of the Index Plus Mid-Cap mutual fund shares offered by ING.