Compare the share classes of one fund and choose the one that suits how you invest.
When you look up a fund you own, you may find it listed several times under the same name, with different letters, currencies and prices. Some of those versions charge less than others. If you can't read the differences, you can't tell whether you hold the version that suits you, or whether a cheaper version of the same investment exists that you could buy.
A fund can issue several share classes. Each class owns a slice of the same pool of investments. The classes differ in their charges, the currency they are priced in, how they handle income, or who is allowed to buy them. The manager runs one portfolio, and the share classes are different ways of owning it.
Every class holds the same investments, so returns before charges are the same across all of them. Any difference in what each class earns comes from its charges, its currency and its income policy. This makes share classes one of the few places where you can lower your costs without changing the investment at all.
Each class has its own name (usually a letter or a code), its own NAV and its own entry in the prospectus. Class letters mean different things at different managers, so class A at one firm need not match class A at another. The prospectus sets out what each class is.
Wei Ling owns an Asia equity fund. She searched for it on a fund platform to compare prices and found six versions. They had the same name, the same manager and the same holdings, but different letters after the name, different currencies and different NAVs. One version had a noticeably lower expense ratio than hers. She wanted to know whether she had been sold the expensive version of her own fund, and she may have been.
An accumulating class keeps the income the fund receives, such as dividends and interest, and reinvests it. The NAV per unit grows faster, and you receive no cash. A distributing class pays income out at regular intervals.
Some distributing classes pay a fixed rate. If the fund's income falls short of that rate, part of the payout may come from capital. That part is your own money handed back to you, and the NAV falls by the same amount. The prospectus and the Product Highlights Sheet must both state whether distributions can come from capital. A high payout on its own does not mean a high return.
An accumulating class suits someone who is building wealth and doesn't need cash, because it saves them reinvesting by hand. A distributing class may suit someone drawing an income, provided they understand where the payout comes from. Wei Ling is building wealth and doesn't need cash, so an accumulating class suits her.
Wei Ling's fund keeps its accounts in US dollars, which she found in lesson 1.4, "Trace one fund from your money to its holdings". It offers USD and SGD classes. An unhedged class in another currency simply converts the NAV into that currency. Your returns in that currency still rise and fall with the exchange rate.
A currency-hedged class uses contracts to reduce the effect of exchange rate moves between the class currency and the fund's currency. Hedging has a cost. Part of it is the cost of the contracts. The other part depends on the interest rate gap between the two currencies, and that part can help or hurt. The prospectus describes how hedging works and states that the class carries its own hedging costs. Hedging can also reduce your gains when exchange rates move in your favour. Whether it suits you depends on how much currency risk you want. The course "Build and run an ETF portfolio" covers that question in more depth.
A clean class is often the cheapest class. It has no trailer fee built into its management fee. The manager isn't paying a distributor out of the fee, so the management fee is lower. Clean classes are usually sold through fund platforms or advisers who charge you directly, through a platform fee or an advice fee, instead of being paid by the manager. The lower expense ratio is therefore only part of the comparison. Add the platform or advice fee, then compare the total with the class that has a trailer fee built in. Module 3 does that full comparison.
Some classes are open only to institutions or to investors putting in large sums. Robo-advisors sometimes use these classes, as Module 4 shows. If your bank or platform doesn't offer a class, you can't buy it there, however cheap it is.
Here are four of the six versions Wei Ling found:
Class A, SGD, accumulating, unhedged: expense ratio 1.75% (the class she owns) Class A, SGD, hedged: expense ratio 1.78% Class A, USD, distributing: expense ratio 1.75% Clean class, SGD, accumulating, unhedged: expense ratio 1.00%, available only on platforms
The clean class would cost her less inside the fund, but she would have to move to a platform and pay its fee.
Start by finding all the share classes of your fund. Each one has its own name or code, its own NAV and its own entry in the prospectus. Check in the prospectus what each class letter means at that manager. For each class, note the expense ratio, the currency, whether it is hedged or unhedged, and whether it is accumulating or distributing. For any distributing class, check the prospectus and the Product Highlights Sheet to see whether distributions can come from capital. For a clean class, add the platform or advice fee and compare the total with the class that has a trailer fee. Then confirm that your bank or platform actually offers the class and that you are eligible to buy it.
Putting a fund's classes side by side in one table makes the choice clearer. In the activity below, you lay out your own fund's classes in one table, with columns for expense ratio, currency and dividend policy.
List the share classes your fund offers. Put their expense ratios, currencies and dividend policies side by side in one table.
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