What does “class” mean when included in the name of a mutual fund?

Mutual funds can be structured as trusts, or as corporations. In the case of corporate-class funds, the fund company establishes a single corporation with different classes of shares (eg. class A, class B, etc.). Hence the term "class" in the fund name.

Corporate-class funds -- also known as "switch" funds -- are becoming more popular with Canadian investors. The reason is simple: Corporate-class funds allow investors to switch between fund classes, within the same corporation, without triggering capital gains outside of a registered retirement savings plan. While the name "class" is popping up more frequently among the growing list of fund families, some firms such as CI Funds uses the term "sector." CI Funds was actually the pioneer of this type of fund product in 1987. As more and more Canadians become tax weary, other fund companies offering tax-saving products. Today, there are more than a dozen mutual fund companies selling corporate-class funds. Benefits of corporate-class funds

• Taxes. The biggest tax sweetener for investors of corporate mutual funds is that you can switch from one fund to the next in non-registered accounts -- within the same corporation -- without triggering a disposition for tax purposes. In other words, there won't be any tax to pay until you redeem your shares or switch to another fund outside of that corporation.
• Active trading. If you're an active investor, who likes to switch back and forth between geographic regions, industry sectors or management styles, corporate-class funds are a tax-efficient vehicle.

Drawbacks

• Potential interest income. If there is too much interest income generated by the corporation, it may not be possible to reduce the tax liability of this interest income through the expenses of running the funds. This could result in higher taxes for the corporation, which, bottom-line, may be passed along to investors in the form of lower returns.
• Cost. Generally, corporate-class funds cost more. These higher fees are reflected in higher management expense ratios -- or MERs -- those management expenses that are part and parcel of every mutual fund purchase.
• Buy-and-hold investing. If you tend to hold on to your funds for years, the corporate-class funds may well be a costly and unnecessary fund option.
• Transferring funds. Investors who transfer their existing non-corporate funds to their corporate-class equivalent may be doing the opposite of what they intended: incurring taxes from a fund sale. A competent financial/tax advisor is your best tax-saving ally.
• Commissions. Just because there's a tax-free switching between corporate-class funds, it doesn't necessarily mean that investment salespeople or dealers will waive the switching fees that they are permitted to charge.

Bookmarks
The fund prospectus: An invaluable source of information for management expense ratios, redemption fees, management style, etc.
www.globefund.com: Current, comprehensive information on mutual funds. www.morningstar.ca: A Canadian industry standard for comparative mutual fund information.