One of the questions investors frequently send me is, "What is a mutual fund institutional class share?" or "What is a mutual fund retail class share?"
Most of the time this happens after reading through a mutual fund prospectus and the shareholder sees that a fund has several different classes. It's often unclear as to what the difference is between the funds, but in most cases, certain funds offer lower fees and expense ratios in favor of large investments.
Sometimes, a mutual fund wants to make itself appealing to both mom-and-pop investors ("retail" investors) as well as big corporations, pension plans, and non-profits ("institutional" investors). The challenge with making a mutual fund a viable option for both types of investors is that bigger institutional clients have such enormous economies of scale that they are not going to accept the low management fees paid by most retail investors.
Instead of offering two different mutual funds, which wouldn't be efficient, many mutual funds decide to create different share classes for the same investment portfolio. One class might appeal to retail investors and one class might appeal to institutional investors. Sometimes, there is even a mid-tier class of shares. The different share classes are likely to have different expense ratios, minimum investments, redemption fees, and sales loads.
A Look at a Real World Example of Mutual Fund Share Classes
To help you understand the concept of mutual fund classes, let's look at the classes of the Vanguard S&P 500 index fund, one of the most popular financial products in the world.
The Vanguard 500 Index Fund is available in several different share classes:
- The Investor Shares fund trades under ticker symbol VFINX and has a 0.14% expense ratio with a $3,000 minimum investment
- The Admiral Shares fund trades under ticker symbol VFIAX and has a 0.04% expense ratio with a $3,000 minimum investment
- The Institutional Fund Shares fund trades under ticker symbol VINIX and has a 0.035% expense ratio with a $5,000,000 minimum investment
- The Institutional Plus Fund Shares trade under ticker symbol VIIIX and has a 0.02% expense ratio with a $100,000,000 minimum investment
As you can see, depending on the class of shares you purchase, your minimum may range from $3,000 to $100,000,000 and the expense ratio on your mutual fund investment might vary greatly.
Wealthier Investors Might Get Additional Benefits from Certain Institutions
The benefits of growing your portfolio don't end at having access to lower cost mutual fund share classes. Many financial institutions offer additional benefits based on the total amount of assets you have under their proverbial roof the same way many registered investment advisors do for individually managed accounts designed to serve affluent and high net worth investors.
Sticking with our Vanguard example, if you had a total of $50,000 to $500,000 invested in Vanguard mutual funds and ETFs, you would qualify for the so-called Voyager Service level, which means commission-free trades on the company's ETFs and reduced commissions on stocks and non-Vanguard ETFs. Plus, there are no service fees.
If you have $500,000 to $1,000,000 invested in Vanguard's mutual funds and ETFs, you are eligible for Vanguard's Voyager Select Services, and investors with more than $1 million in Vanguard mutual funds and ETFs are eligible for Vanguard's Voyager Flagship Services. Each level offers an increasing number of benefits for the investors. That, of course, is on top of the fact you are already paying much less in expense ratios on your underlying funds by owning the higher minimum share classes.
More About Investing in Mutual Funds
To learn more about mutual fund investing, read The Complete Beginner's Guide to Investing in Mutual Funds, which is a collection of some of the site's best mutual fund articles and resources.