Mutual funds invest by pooling money from numerous individual investors and using that money to buy securities, such as stocks and bonds. All funds have expenses that they pass along to investors, and some charge fees or commissions as well. Many funds offer different share classes to differentiate between the types of fees investors pay to own the fund. Institutional shares and "A" shares are two of the main share class types.
Class "A" shares charge investors an upfront commission, also known as a front-end sales load. Most "A"-share sales loads are about 5.75 percent, although they can go as high as 8.5 percent. Institutional shares typically carry no upfront expense, although if one exists it will be much less than the typical "A" share. Both types of share class generally have no charge to sell, although a minimum holding period may be required to prevent short-term trading.
Class "A" shares often carry an ongoing asset-based commission. However, this fee, typically 0.25 percent per year, is usually lower than the charge for other retail share classes. For example, "B" shares and "C" shares, which don't charge upfront commissions, usually levy 1 percent per year as an asset-based fee. Institutional shares do not carry a 12b-1 fee.
All share classes have annual expenses, which reflect the operating costs of the fund as a whole. The bulk of a fund's annual expense is usually the management fee. For example, as of 2012 the annual expenses for the John Hancock Classic Value Fund were 0.97 percent, with 0.79 percent going to the management fee. Annual expenses are usually the same for each share class.
Since institutional shares get the same performance out of fund managers with lower overall expenses, you'll always be better off buying institutional shares rather than Class "A" shares. Unfortunately, most individual investors don't qualify for institutional shares. Fund companies such as John Hancock require investors to be recognized business entities, such as retirement or endowment funds, accounts registered to insurance companies and bank trust departments, or corporations. Institutional shares also carry a minimum purchase requirement that is usually beyond the reach of most investors. In addition to the other requirements, John Hancock asks for a minimum investment of $250,000 to qualify for its institutional share class.
- U.S. Securities and Exchange Commission: Mutual Fund Classes
- FINRA: Understanding Mutual Fund Classes
- John Hancock Mutual Funds: Who Can Buy Institutional Shares?
- John Hancock Mutual Funds: John Hancock Classic Value Fund -- Choosing A Share Class
- John Hancock Mutual Funds: Classic Value Fund -- Annual Operating Expenses
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