What are Class R shares of investment mutual funds?

Definition and Example of R Class Mutual Fund Shares

R Class mutual fund shares are a class of shares designated for retirement. If you hold mutual funds in a 401(k) plan, or if you have done some research to find a no-load version of your favorite fund, you may have encountered R Class mutual fund shares.

Key Points:
– R Class mutual fund shares are only available through employer-sponsored retirement plans that are designated with the letter “R.”
– R Class mutual fund shares do not impose fees, which are fees charged to the investor in some mutual funds.
– The lower the expense ratios, the more money you will lose due to fees.
– R Class mutual fund shares may have higher expense ratios (fee percentages) than index funds, so try to look for R Class mutual funds that have average or lower-than-average cost ratios.

How R Class Mutual Fund Shares Work

R Class mutual fund shares are available through 401(k) plans because mutual funds that impose fees are not allowed in employer-sponsored retirement plans. Investment firms that offer fee-charging funds—primarily sold through commission-based brokers—have created the R share class to overcome this issue.

Although R shares can have reasonable expense ratios and be better than using fee-charging funds, such as Class A, Class B, or Class C shares, they still tend to be higher than those found in index funds.

For example, the American Funds Growth Fund of America R1 (RGAAX) has an expense ratio of 1.40%, which is slightly above the average expense ratio for actively managed growth funds. However, compare that to the Vanguard Growth Index Fund Admiral Shares (VIGAX) which has an expense ratio of 0.05%, and you’ll find a difference of 1.39% in favor of VIGAX.

Note: Over time, the higher expense ratio of R stock will be a significant factor in performance. In the long run, this can translate into thousands of dollars less in total profit.

What This Means for Individual Investors

It is wise to take advantage of any matching contributions your employer may offer when you contribute to your 401(k) plan. However, be sure to pay attention to costs, especially if there is no employer contribution. You may choose to open your own retirement account, such as an Individual Retirement Account (IRA), at one of the best no-load mutual fund companies.

If you want to take advantage of your employer’s 401(k) plan, and R Class mutual fund shares are the only option, you can still use them and find the best available examples that fit your goals and risk level.

When it comes to choosing between R shares and a low-cost index fund, most wise investors choose the index fund, especially if they are investing for a period of 10 years or more.

Sources:
– Investor.gov. “Updated Investor Bulletin: Mutual Fund Classes.” Accessed Nov. 20, 2021.
– Morningstar. “Descriptions of Share Class Types.” Accessed Nov. 20, 2021.
– Capital Group. “SMALLCAP World Fund.” Accessed Nov. 20, 2021.

Source: https://www.thebalancemoney.com/what-are-mutual-fund-class-r-shares-2466763

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