When stock markets climb, the fees associated with equity ownership are easy to shrug off. But with the stock market ailing in 2008 — the Standard & Poor’s 500-stock index is down 9.75 percent as of Friday — mutual fund investors are right to wonder and worry about the costs they are paying to own their shares.

Tallying these costs is especially hard for investors in load funds — those with sales charges — bought through a broker. These are the funds of the alphabet-soup share classes, A, B, C and so on, whose fees vary because of differences in the sales charges and when they are levied.

While the bulk of mutual fund investors wisely choose no-load funds — 73 percent in 2006, according to the Investment Company Institute — $37 billion went into funds with loads. Some 80 percent of mutual fund investors consult with brokers and other advisers when buying mutual fund shares outside of their retirement plans, the organization said.

Fund prospectuses, nobody’s idea of easy reading, don’t help investors understand what they are paying in expenses, either. Many prospectuses show total return figures that do not factor in sales charges, for example. Even expense ratios, the numbers that most investors look to as a proxy for costs, do not give shareholders what they probably want: an estimate of their account’s value after deducting fees and sales charges.

Happily, such a number can be found on the Web site of Finra (the Financial Industry Regulatory Authority), the private regulator of brokerage firms and their employees, which was formerly known as the NASD. The organization’s mutual fund expense analyzer, which can be found at http://apps.finra.org/investor_Information/ea/1/mfetf.aspx, is a nifty tool that allows investors to compare the costs of various funds and share classes in a way that is tailored to their expected holding period and estimated returns.

Finra cautions that its cost analyzer generates hypothetical results because the data that goes into it involves estimates both for holding periods and returns. But it is easy to use and far more illuminating about fees than most prospectuses. Any investor who has been persuaded by a broker to buy a load fund should consult the fee analyzer first to see which share class is cheapest.

One message comes through loud and clear from a trip through the analyzer: There is no such thing as the right share class for all investors. Indeed, one of the most intriguing findings is that Class A shares, the most commonly sold class today and the one usually characterized as the best value for individual investors, are often more expensive than B and C shares.

Class A shares have front-end loads, meaning that the sales charge is paid at the time of purchase. Class B shares have loads that decline over time, eventually disappearing, and are payable upon selling shares. Class C shares typically have higher asset-based sales charges levied annually, but no front- or back-end loads.

Class A shares are typically viewed as cheaper because their lower operating expenses are thought to offset their upfront sales loads, which can run to 5.75 percent. In 2006, such shares accounted for 51 percent of all load fund sales, versus 13 percent in 2002. Finra’s fee analyzer shows how wrong this conventional wisdom can be.

That Class B shares can be a better value may also surprise anyone who has paid attention to regulatory actions against fund brokers in recent years. In many such cases, Class B shares were central to investor abuses — brokers sold large numbers of the shares to investors who would have done better with Class A shares. The scandals led so many to view Class B shares negatively that some financial services firms now limit the sales of the share class.

But for an investor placing $40,000 or less into a fund for a five-year period, Class B shares often result in lower fees than A shares. One reason is that the high front-end load of the A shares means investors have less money working for them right out of the gate.

In any case, brokers pushing Class A shares because of the problems with the Class B shares are laughing all the way to the bank.

Here are some hypothetical examples of how fees can affect returns in different share classes:

The analyzer shows that a $40,000 investment in the Lord Abbett All Value fund, to be held for five years with an estimated return of 5 percent a year, would generate the lowest account value if held in Class A shares: $45,532. The C shares would produce the highest, $46,787, and an investor in the B shares would wind up with $45,987.

If the Franklin Large Cap Value fund returned 5 percent annually for seven years and you invested $10,000 for the period, the A shares would again generate less. An investor in the A shares would have $12,065; a holder of B shares would receive $12,241 and the C class would produce $12,250.

A third example is the Columbia Acorn International fund. A $20,000 investment held for three years that returned a hypothetical 5 percent a year would generate $21,785 in the Class C shares and $21,307 in Class B. And Class A brings up the rear, with an account value of $21,011.

For all their notoriety, Class B shares can be even more attractive because brokers will often waive the back-end loads when sales occur as a result of a divorce, disability or required minimum distributions in an individual retirement account.

After comparing account values in a variety of funds and circumstances, C shares seem to be the cheapest of the alternatives most of the time. But not always.

A $40,000 investment in the Alliance Bernstein International Value fund held for seven years with a hypothetical annual return of 7 percent would eke out the best result in Class A, at $56,614, while the B and C classes would turn in the same $56,303.

And the Class A shares of the Davis New York Venture fund would produce the best outcome when $25,000 is invested and held for eight years, assuming an 8 percent annual return. In that circumstance, the A shares would generate $41,190 while the B shares would produce $40,917 and the C shares $40,691.

All of this illustrates that the conventional wisdom — that Class A shares are the “best” for investors — is not always wise. Every case is different, which is why the Finra analyzer is so helpful. It allows investors who insist on buying load funds to enrich themselves first, their brokers second.

[Via - NYTimes.Com]

How To Turn $60 Into $1000 In Three Months With Domain Names

Newlyweds caught in drag race

Sixteen Cigar Sampler - Want One?

Katrina Victims Claim $3 Quadrillion In Suffering

Selling A Business Is Not As Easy As It Used To Be

Free Electronic Bible

Chef's Corner