Mutual fund companies tailor their products to be sold into different financial markets. One class of funds will be for retail investors, another for 401(k) accounts and another to be sold to institutional investors like large pension plans. Although the institutional class shares are often the most appealing from a specific fund, the minimum investment amounts and other restrictions usually put this class of mutual fund beyond the reach of individual investors.
One Fund Different Classes
The institutional class shares are just one share type out of several for a specific mutual fund. A mutual fund will have a single investment portfolio, buying stocks and/or bonds to meet the fund's investment objectives. The different share classes of the fund will own a proportional amount of the same portfolio. A fund may have five or more share classes with each class targeted toward a specific type of investor.
Expenses and Fees
The different types of mutual fund share classes are distinguished by the fees and expenses associated with the class. A load-fund can have class A shares with a front-end load, class B shares with deferred sales charge, class C shares with a different load structure, class R shares for retirement plans with no load but including 12b-1 marketing fees and institutional shares with no marketing fees in the expense ratio. A no-load fund may have different share classes for retail investors, retirement plans and institutional accounts.
Identifying Institutional Shares
The institutional shares of a mutual fund are typically referred to as class I or class Y shares and the I or Y will be included in the stock symbol for the fund. The institutional shares will also show up at the top of the performance lists. This is because this class of shares will have the lowest annual expenses of any class of shares. Lower fund expenses mean higher returns. For example, a fund may have an expense ratio of 1.00 percent on its retail shares and just 0.40 percent on the institutional class shares. The I shares will outperform the retail shares by 0.60 percent every year.
Institutional class shares typically have minimum investment levels of $5 million, $10 million or even higher. Even if you can invest $5 million, the fund company will probably not sell you the shares unless your are actually an institutional financial company. The institutional shares of some mutual funds can be invested in through wrap accounts offered by financial planners or investment advisors. Of course, the advisors will tack their own fees on top, negating the benefits of buying low expense institutional class shares.
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