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A, B, C, Shares, And So On

Question: I have some investment and savings questions. I'm 24 with about 12,000 in CDs and no debt. I recently went to a financial planner from Primerica Financial Services. They are suggesting for me to open up a Roth IRA with one of their Mutual Funds...to be determined. Because I am going to have these funds for the long haul should I buy A or B shares? They have suggested B. Are there calculators available see what the difference will be for the different shares because of the different fees? What should I look for in a mutual fund company? There seems to be so many. Over the long haul, what % gain can I predict?...Thanks Much, Ray

Answer: It's great that you want to open up a retirement savings plan. But I wouldn't buy shares labeled A, B, C, D, and so on. Instead, why not open up a Roth-IRA with a no-load mutual fund company?

Here's what I mean. The fees you pay to own mutual fund shares matter a lot. There are all kinds of fees, but essentially you can divide the mutual fund universe into two basic types: "load funds" and "no-load funds." Load funds charge a levy when you buy or sell. They also assess a fee for ongoing expenses, the costs associated with running a fund.

The load is the commission paid to the broker who advised you to get into a particular fund. Typically, the load is paid when you buy the fund (those are so-called A shares), but some mutual fund companies impose the fee when you sell (B shares). The other letters represent combinations of the two.

A no-load fund doesn't impose a fee on either end. It does charge a fee to meet ongoing expenses. But it's realistic to expect to pay a fee -- you're not going to get something for nothing. The important thing to remember is to evaluate exactly what those fees are in total and how much will they cut into your return on investment.

So, if I invest $1,000 in an equity mutual fund with a 5% load, $50 goes to the mutual fund company (or broker) and $950 goes into my investment. Now, let's say I invest the same $1,000 in a no-load fund. No one steered me toward this fund. I did my own research, spent my own time. The payoff is that the full $1,000 goes into my mutual fund investment. But in both cases -- load fund and no load fund -- I'll pay an operating fee. And that fee can range significantly, from around 0.10% to well over 2%. .

The Securities and Exchange Commission offers a Mutual Fund Cost Calculator at its website. It makes it easy for investors to compare the costs of owning different mutual funds over time. The Cost Calculator takes the mystery and math out of the cost equation, revealing how costs add up over time. And to get you started on investing and personal finance, I'd recommend taking a look at Burton Malkiel's The Random Walk Guide to Investing: Ten Rules for Financial Success. It's short, and full of good advice.

03/04/08 by Chris Farrell

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Money Market Savings Accounts

Question: Chris -- You mentioned money market mutual funds a couple times on last week's show. Are money market mutual funds the same as money market savings accounts? Can you get them at banks, or just brokerages? Are they still as liquid (make deposits, withdrawals) as money market savings accounts? Thanks -- I appreciate all of your and Tess's advice. Brian, Auburn, AL

Answer: Money market mutual funds and money market savings accounts are similar in many respects, but there are critical differences between the two. A money market savings account at a bank typically pays a higher rate of interest than a regular savings account. The account usually has a higher minimum balance requirement and limitations on the number of withdrawals a month. A money market savings is insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). In other words, if the bank goes belly up, your money is safe (assuming you're under the insurance limit).

The same isn't true with a money market mutual fund. There is no FDIC insurance backstopping the account. In return, you'll get a slightly higher interest rate with the money market mutual fund compared to the money market savings account. Still, money market mutual funds are among the safest investment options available to individual investors. There are two simple ways to reduce risk with a money market mutual fund. First, invest with a brand-name financial institution with the resources to backstop a money market fund if it gets into financial trouble. Second, choose the most conservative fund option. It's the one that is comprised of mostly short-term U.S. Treasury securities and federal agency debt. There's no reason to chase higher yields by taking greater risks with this money. You want your principal safe and earn a decent interest rate.

04/23/08 by Chris Farrell

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