When investing in a mutual fund, you may have the opportunity to choose among several share classes, most commonly Index, Class A, Class B, and Class C. The differences among these share classes typically revolve around how much you will be charged for buying the fund, when you will pay any sales charges that apply, and the amount you will pay in annual fees and expenses. This multi-class structure offers you the opportunity to select a share class that is best suited to your investment goals.

The Index Way is the Only Way
Let's be very clear up front. Our advisors only recommend no-load index funds to clients. With their minimal annual costs and tax efficient structures, index funds are an easy favorite at Lightship Mutual.

So you ask, if index funds are so great, then why do we need Class A, Class B, and Class C mutual fund shares anyway? Great question! Well, it all has to do with a little something called "commission". In the old days, you had to pay a sharply-dressed stockbroker to purchase your mutual fund shares for you. And in exchange, you paid him/her a commission of 5-10% to do so.

But then then the whole Internet revolution came along, and what do you know...now we can purchase our mutual fund shares directly from the fund companies and cut out the middle man (and his $2000 Italian suit). Ain't life grand? At any rate, it is still important for you to know what the other various classes of funds are, just in case someone ever tries to pitch them to you.

The Costs Associated with Mutual Funds
Typically, mutual fund costs consist of two different fees: the initial sales charges and the annual expense. The sales charge, often called a "load", is the broker's commission, deducted from your investment when you buy the fund, or when you sell it. The annual expenses cover the fund's operating costs, including management fees, distribution and service fees (commonly known as 12b-1 fees), and general administrative expenses. They are generally computed as a percentage of your assets and then deducted from the fund before the fund's returns are calculated. (To better understand what these charges are, you should review the Fees and Expenses section of the fund's prospectus.)

Class A Shares
When you purchase Class A shares, an up front sales charge, called a front-end load, is typically deducted, thus reducing the actual amount of your initial investment. For example, suppose you decide to spend $1,000 on Class A shares with a hypothetical front-end sales load of 5 percent. You will be charged $50 on your purchase, and only $950 will be invested. You lost fifty dollars just like that...Ouch!

Class B Shares
Unlike Class A shares, there is no up-front sales charge, so all of your initial investment is put to work immediately. However, Class B shares do have a back-end load, often called a contingent deferred sales charge (CDSC) that you pay when you sell your shares. The load usually decreases over time (typically 6 to 8 years), although this varies from fund to fund. By the end of the time period no charge applies. At that stage your shares may convert to Class A shares.

For example, suppose you invest $5,000 in Class B shares, with a 5 percent CDSC that decreases by 1 percent every year after the second year. If you sell your shares within the first year, you will pay 5 percent of the value of your assets or the value of the initial investment, whichever is less. If you hold your shares for 6 years, the CDSC will be reduced to zero.

Class C Shares
When you purchase Class C shares, a front-end load is normally not imposed, and the CDSC is generally lower than for Class B shares. This charge is reduced to zero if you hold the shares beyond the CDSC period, which for Class C shares is typically 12 months.

Do Your Homework
Don't just take our word for it. Grab and pencil and paper and check out the National Association of Securities Dealers (NASD) at www.nasd.com. You can also find information on the Securities and Exchange Commission (SEC) website at www.sec.gov.

As you consider how best to invest in mutual funds, remember that there's no guarantee any mutual fund will achieve its investment objective. You should discuss all of your investment goals with a qualified financial professional.