What is an r-class mutual fund?

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What is an r-class mutual fund?
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Since the 1980s mutual funds have developed different classes of shares to be sold through different sales channels. The different share classes are designated by letter and mutual funds may have A, B, C, F, I, R and possibly other share classes. The class of shares an investor owns is dependent on the channel through which the fund was purchased.

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Identification

R class mutual fund shares are available only through an employer's 401(k) retirement plan. R class shares can be thought of as retirement shares. If an employer's 401(k) plan has R class shares there will no option for other types of share classes. R class shares do not refer to specific mutual funds but to the class of shares for each fund offered in the retirement plan.

History

The original class of shares for mutual funds with loads or sales charges are called A shares. Investors pay an upfront commission to buy A shares. Over time, mutual fund companies have added different classes of shares to be sold through different sales channels. B shares have a declining redemption fee instead of the upfront sales charge, C class shares have a smaller sales charge than A shares. I shares are sold to large, institutional customers and have no charges and the lowest fees. R class shares were developed to meet the specific requirements of retirement plan sales people and administrators.

Function

The difference between the shares classes of a particular fund is the fees and expenses charged to the shareholders. Class A shares will typically have an upfront sales load of 5 per cent to 6 per cent. Class R shares allow investors in the employer retirement plans in which the fund is offered to buy the shares without a sales charge. However, the R class shares will have a higher annual expense ratio than the class A shares of the same mutual fund. The extra expense ratio taken from the assets of the R shares is paid to the 401(k) plan administrator to offset some of the plan costs.

Significance

The expense ratio of a mutual fund directly reduces the return on investment to fund shareholders. If one class of shares has an annual expense ratio of 1.00 per cent and that of another is 2.00 per cent, the second class will have a total return 1 per cent lower each year an investor has money in the fund. R class shares typically have additional expense fees of 0.50 per cent for Rule 12b-1 distribution fees, compared to 0.0 per cent or 0.25 per cent for A shares and an additional 0.25 per cent as a shareholder servicing fee. Some funds charge this fee on the A shares and some do not. The result is that R shares will have an expense ratio of 0.25 per cent to 0.75 per cent higher than the A shares for the same mutual fund.

Considerations

If you are selecting fund allocations for your 401(k) plan at work you will not have a choice of share classes. The shares in your plan will be R class shares. If your 401(k) plan offers mutual funds from different fund companies, compare the total expenses of each fund and select the fund with the lowest expenses for similar investment objectives.

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