Mutual Funds

What are Mutual Funds?

When you buy a mutual fund, what you’re getting is essentially a sampler platter of investments. It’s a bunch of “fractional shares” — smaller slivers of many assets instead of big chunks of just a few things. This diversification helps protect you against any one thing going down the drain and wiping you out.

Get those reading glasses ready.

Types of Mutual Funds:

There are different types of funds, and not all of them are created equal.

How it works:

If A, B, and C-shares are the same, which one will your broker try to sell you? The A-shares. Why? Because it’s got the biggest rip — that’s what you call the amount you rip from the client’s account and put into the firm’s account. This is how brokers working on commission make bank.

The A-Shares Sales Pitch:

The advisor is going to sell you A-shares by asking if you’re stable, if you’re planning long term, that kind of thing. He’ll be feeding into answers you should be giving anyway if you’re thinking of parking 10K in an investment. Of course you’re thinking long term, of course you’re stable right now, of course you want the safest investment. And that’s what they’re going to say A-shares of ASF are.

B-shares

Johnny’s Ex comes in with 10K and she’s all about the ASF. But this is a strong, smart woman, and she won’t stand for any up-front fees. She flatly refuses to accept that 5% rip. Okay, great! She can immediately start making gains on that extra 500 bucks she’s not losing to the rip.

C-Shares

Now for my absolute favorite: C-share classes. The client comes in, and he’s a total enlightened Chadzilla.

Not My Money, Not My Job

As a broker, it’s not your job to convince people of the best options they have available. You have to feel them out and see where their circuit breakers are — figure out what you absolutely can’t pitch because they’ll just walk away. Your job isn’t to get them into the best plan for making them money, it’s to get them into any plan to make you and your company money. So if they want to come in and park money in C-shares for 10 years, you let them.

A Real Example

The table below shows a realistic side-by-side comparison of each share class based on the same initial investment with compounding interest factored on an annual basis. Year over year profit is assumed to be the stock market average of 8% per year and brokerage fees are in line with normal management fees.

For more finance, stock, and crypto analysis, join me on twitter @Nikadesh

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Nikadesh

Nikadesh

12 cats in a man suit. Finance and Japan. May your bags be full and your candles green.