People invest when the economy is down so they're ready when the economy goes up again. You can buy mutual funds for a lower share price when the economy's down and watch your investment grow as things improve. This is a long-term strategy. Mutual funds come in different classes of shares that charge different fees at different times. Some of these classes are not good for a long-term strategy.
Class A Shares
Mutual funds charge you a sales fee, or load, in advance for class A shares. This fee is based on a percentage of your initial investment. For example, if you invest $1,000 in class A shares, you might pay a 3 percent load. This would come to $30. If your investment makes money, you won't have to pay a sales fee based on the increased value of your fund. This works well for a long-term strategy if your investment goes up, because the fund charges the percentage at the time the value was the lowest. If you expect a down economy to turn upward, it's cheaper to pay a percentage now rather than pay a percentage when your investment is worth a lot more.
Class B Shares
You don't pay a sales charge at the time you buy B shares. Instead, a mutual fund charges you when you sell your shares. That charge will be based on a percentage of what your investment is worth at the time you sell. For example, if you invest $1,000 and it goes up to $1,500, a 3 percent sales charge would come to $45. You pay the percentage on the final value of your investment instead of your initial value. If you invest during a down economy, and it gets better in the long term, your sales fee will be higher with class B shares because your investment value will be higher.
C Shares Expenses
You pay a smaller up-front sales fee for C shares, but you pay much higher ongoing management fees than with class A or class B shares. This means the longer you hold C shares, the longer you pay high management fees. You don't know how long it will take for a down economy to improve, so you could need to hold your shares a long time. This makes the management fees of class C shares unattractive when investing in a down economy.
Class A Disadvantage
Though class A shares charge you the lowest fee if your investment goes up in value, you're sacrificing part of your investment money at the start. If your goal is to preserve your money, class A shares work against that goal by requiring the upfront fee. If you really think the economy and your investment could go down, you might consider avoiding mutual funds as a whole until you see definite signs of an upturn, when class A shares would make more sense.
- Comstock/Comstock/Getty Images