What Classes of Mutual Funds Perform Best in a Down Economy?

by Victoria Duff

Many mutual fund families offer at least a couple different classes of shareholding to their investors. Class A shares generally have a front-end sales load. Class B shares are usually the class that has no front sales load, instead, they have a contingent deferred sales load (CDSL) and a 12b-1 fee. Class C shares have other options such as lower 12b-1 fees, CDSL or front-end sales loads than Class B’s or Class A’s, and no conversion feature. Class I shares are sold only to institutions. Some of these classes of stock differ slightly from one mutual fund family to another.

Class A Shares

When you buy Class A shares, you pay your fees up-front. If you are expecting a significant profit from the fund you buy, it would be to your advantage to pay your fee up front on the money you invest rather than paying the fee when you sell, based on the investment plus expected profit. For example, if you buy a bond fund during a high interest rate period and you expect the Federal Reserve to aggressively lower rates to cool off a booming economy or spur a recession into recovery, your bond fund should accumulate significant profits as rates decline.

Class B Shares

The CDSL is a fee that is charged when the mutual fund is sold within six years of purchase. A 12b-1 fee is paid by the mutual fund to the distribution agent for services and distribution of the mutual fund shares. These cut into your return on investment and, if the securities in your fund don't make big profits or book losses, your investment will be hard hit by the fees, although the CDSL will be lower if you sell out to transfer your money to a different fund.

Class C Shares

Carefully consider the options available in Class C shares. During a recession, you may not be able to count on a strong return on investment through profits on a stock fund or attractive interest on your bond fund. In this case, the lower the fees, the better chance you have of not experiencing much damage to your portfolio. These funds may not provide a step-down in fees over time or special conversion feature, but you may not hold the fund for long enough to make these valuable -- particularly during a recession when you should watch the asset mix in your portfolio for deterioration, and move to take advantage of any opportunities presented by a recovery.

Class I Shares

Institutions often invest large amounts of money in mutual funds, particularly those that invest in bonds. For this reason, these funds have low fees that make them competitive against the costs of institutional transactions in the open market, which have very low commissions and fees.

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I have 14 years of experience working with alcoholics and would like to write about this subject. I have included some of my articles on business and Internet marketing, but I am also capable of writing and editing other subjects.