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What are F-class funds?

Among new product lines for cost-conscious investors are F-class mutual funds. The letter F stands for fee-based units.

You may think that mutual funds are a generic group of investments but they’re actually categorized by a class system. The categories reflect a different fee structure depending on the amount of your investment. When it comes to fee-based funds, the general rule is: the greater the amount of assets to invest, the lower the fee structure will be.

Most investors are familiar with the common garden-variety fund product, classified as A-class funds by most firms. But if you have $500,000 to invest in a fund, I-class funds offer much lower fees. F-class funds are geared towards investors with close to $100,000 to invest, but some are available for smaller portfolios. Differing from traditional mutual funds that charge a management expense ratios (MERs), F-class alternatives pay no sales commissions, trailer fees, or other compensation to advisers.

F-class funds vs. regular mutual funds: 

Fees: As mentioned above, F-class funds refer to fee-based funds. Don’t let the word fee scare you. These funds strip out the portion of the MERs called trailer fees that are paid to advisers for continuing service to your account. The trailer fee can add a full percentage point to management fees on an equity fund. The average cost of money management with traditional equity mutual funds is about 2.5 per cent of your assets. In practice, F-class funds can be a bit more than one percentage point cheaper than standard funds. Over the long term – which is the investment philosophy behind all mutual funds – an annual fee reduction of 1 per cent can really add up in cost savings.

Example of cost saving: The standard version of Templeton International stock fund (A-class) has a MER of 2.64 per cent; the F-class alternative has a MER of 1.52 per cent. Bissett Canadian equity fund has an A-class MER of 2.34 per cent; the F-class fund has a MER of 1.27 per cent. Royal Balanced fund has a MER of 2.35 per cent; the F-units a 1 per cent MER. •

Minimum investment: Generally, F-class funds are geared towards investors with $100,000 in assets to invest in a fund, or family of funds.

Availability: F-class funds are widely available at major fund companies, including Mackenzie, AGF, AIM, CI, and Franklin Templeton. Most recently, the banks have entered the F-share market. TD Mutual Funds first introduced F-share funds late last year. Today, the Bank of Montreal, Bank of Nova Scotia, and Royal Mutual Funds Inc., offer F-share products. F-class funds are only available from financial advisers. You won’t find them on the Net or through a discount fund dealer. One exception to this is the on-line fund dealer, ASL Direct , who offers F-class funds.

A word of caution: 

If you add F-class funds to a fee-based account that charges an annual fee in the 1-per-cent range, then adding F-class funds would put you in the same fee ball park as if you had bought the regular version of the fund. Consulting with a trusted financial advisor would be invaluable to determine whether F-class funds meet your needs and investment goals.