How to buy a mutual fund:
First, you have a choice of buying a ‘load’ fund or a ‘no-load’ fund. Neither one is free, if someone weren’t making a buck, the product wouldn’t exist. The overall expense in owning a load fund is generally greater than owning a no-load, but as an advantage, you get an advisor with load fund that should provide investment assistance. Load funds are normally bought through a brokerage, bank, credit union, or similar institution. The person selling you that fund assumes the responsibility of ensuring it is a proper product for you. And, the advisor should continue to monitor the performance of that product on your behalf.

We think that people working for brokerages tend to be better trained and more knowledgeable than those at banks and credit unions, although banks are upgrading their brokers through purchases of brokerage houses. The broker is attempting to provide service that will retain you as a client for his or her entire career. It is important for your advisor to have experience and be a good listener. Having said all that, it is essential to note that to purchase a no-load you normally need to contact the company offering the product you wish to own. You are then on your own unless you have a “fee only broker” to assist you and who charges a flat fee for counsel.

Should you decide to start by using a broker, commission planner, or other paid help to assist you in the decision making process, a load fund could be a good choice. But, now you must decide how you want to pay for the purchase. There are three common elections you can use; you may buy either ‘A’, ‘B’, or ‘C’ shares. The underlying product is the same; you are deciding whether to pay cash up front or spread the cost over time. Here is how each one works:

‘A’ Shares carry a sales load or upfront cost, depending on the company and the nature of the fund, (bond funds generally cost less than stock funds) you will be charged between 4% and 5.75% of your investment right off the top. Example, a $10,000 investment carrying a 5.75% load would provide a $9,425 investment in the market, with the balance going to the Fund Company which shares part of that 5.75% with your broker. This is how brokers are paid when they sell funds.

‘B’ Shares allow for your investment to be made with no front end expense, but has a higher operating cost. The up side is that all $10,000 goes into the market. ‘B’ shares carry a penalty period for early withdrawal of funds which may be up to 8 years. This penalty declines as the years pass, for example 5%, then 4% and on down to 1% near the end of the period. Then ‘B’ shares convert to ‘A’ shares with a lower operating cost. ‘B’ shares have fallen into disfavor in the recent past, perhaps because people tend to forget or were never told that the early withdrawal penalty was present. Still, you may freely swap from one ‘B’ share fund to another ‘B’ when they are both within your family of funds. The earnings may be withdrawn without penalty at anytime because the penalty applies only to the original contribution.

‘C’ Shares have no upfront fees and generally require only a one year or maybe an 18 months holding period with an early withdrawal penalty of 1% or a little more over that one year time frame. If you decide to walk away after one year, you are not charged any load costs. This appears to be the best choice, but let’s look further.

We at Juniper Tree generally prefer the “C” share for load funds. There is no upfront cost to the investor and total costs to the investor for the first 5 to 7 years are actually less than for “A” shares (we checked the prospectus on several funds). We have found that people new to investing and/or retirement tend to make major changes in their finances in the first years of ownership. The “C” share lets them clear out or make a major withdrawal with little or no expense.

An advisor receives the largest upfront commission with the “A” share, next best payout with the “B” share and least with the “C”. The “C” higher operating cost continues for as long as you keep the fund. Since the broker shares in the higher operating fee he is motivated to retain a good relationship with you and will make more money along with your success.

Comparing Costs of load funds:
Mutual fund companies have an average operating fee of around 1.5% for an ‘A’ share and about .75% more for ‘B’ and ‘C’ shares. But, you will have, per our example, $575 more dollars working in the market to help offset the extra percentage cost. The difference between ‘B’ and “C’ is that the ‘B’ fees will eventually drop to the ‘A’ rate, while ‘C’ remains at the higher rate. The fund prospectus will provide projected cost to the investor for the 1, 3, 5, and 10 year periods based on a $10,000 investment. We reviewed several different funds and families and found that for 5 years the projected cost were lowest with ‘C’ and highest with ’A’s. For 10 years, however, ‘A’s had a lower cost. How long do you anticipate keeping that fund? Average is 2-3-years.

The ‘A’ share gives you a greater advantage in reduced costs if you place larger amounts of money with one fund family. It does not have to be in just one fund; it can be diversified into several different funds and still qualify for a lower front end load. The required amounts may start as low as $25,000 to reach the first “break point” for a slight cost reduction. The larger your investment, the bigger the break with one million dollars having no sales loads. You can count all of your different investment vehicles including IRAs, 403bs, regular accounts, and other applicable accounts elsewhere to qualify for the discount. It may be worth your time to review this possibility with your broker, who should have asked you about it up front.

Conclusion:
Mutual funds are an excellent tool to start your investment strategy as they lend themselves to regular and ongoing contributions. Most have minimum starting dollar requirements, but if you commit to making ongoing contributions, they will take very small amounts. We use them, at least in part in our large diversified portfolios as those active managers add value through experience and significant research resources.

To track individual funds on the web you will need to know the symbol of the fund. This consists of 5 letters, always ending in x. Examples: FFACX,CWBCX, PRTCX.

Remember: not FDIC insured --- may lose value---- no bank guarantee