Each fund has only one asset in which the money invested flows together. But sometimes it is divided into numerous classes of shares, called tranches. They are mainly used to serve different target groups and may differ in several characteristics, such as fund currency, currency coverage, use of proceeds, costs and tradability. Some of these attributes also affect performance and therefore our Fund valuation outside of.
The names of the individual tranches are composed of the name of the fund and, mainly, cryptic letter abbreviations. Each installment receives its own security identification number (ISIN).
DWS Top Dividend with five share classes
Our Fund Database currently contains 23,699 share classes belonging to 9,507 funds (as of April 30, 2024). Just over half of the funds have at least two different share classes. 30 funds even have more than 20 tranches. The leading candidate is fund provider BlueBay, which has launched 37 tranches each for two of its funds.
We will show the differences that can arise between tranches of a fund using the example of DWS Top Dividende, one of the largest and best-known German funds. This has five different share classes. The different costs lead to different returns and even different assessments of the investment success of the individual tranches. But: Unfortunately, private investors can purchase the cheapest share classes from significantly fewer sources, as the following overview shows. The oldest tranche, LD, is better negotiated.
Use of income: distribution or accumulation
An important distinguishing feature of tranches is the use of income. Mutual funds generally generate regular income from their investments: bond funds in the form of interest distributions, stock funds through dividends. Investors are entitled to these earnings and they are automatically transferred to the (accumulated) assets of the fund or distributed regularly, i.e. transferred to the investor’s clearing or current account.
For long-term asset accumulation, it makes sense for regular income to remain on the fund’s assets because it generates new income (effect of compound interest). The most convenient way to do this is with an accumulation share class.
Building wealth with compound interest effect
However, there are several funds for which only distribution versions are available. Sometimes your own custodian bank only offers these tranches for the fund in question. If you don’t want to lose the effect of compound interest, you should use the distributions to buy new fund shares. This is particularly easy with savings plans, for example, topping up a monthly installment once a year with the distribution amount. Of course this is not exact to the last penny, but essentially this method works very well. Few banks also offer a automatic and free reinvestment income, for example ING, from a distribution amount of 75 euros.
Distributions as Additional Income
However, many fund buyers do not want to reinvest the distributed money, but are satisfied with regular additional income. As with stock dividends, you rely solely on future price gains and use the income, for example, to improve your pension or simply for consumption expenses. Existing fund shares remain untouched.
Discounts for institutional investors
Different parts of a fund often differ significantly in their annual costs. Fortunately, this problem only exists with actively managed funds, but not with exchange-traded index funds, so-called ETFs. But where do the cost differences come from? This is mainly due to the different sales commissions. These are taken from the fund’s assets and go to points of sale, usually banks or savings banks. For tranches of funds aimed at institutional investors, such as large asset managers or pension funds, fees are significantly lower than for end-client share classes, sometimes even zero.
Private investors pay more
Many buyers of actively managed funds are being double-bleeded. When buying equity funds, you typically pay around 5% of the investment value as the so-called issue fee. Additionally, there are significantly higher annual costs compared to tranches for institutional investors. In the long run, these are much more important than purchase costs.
Fund stores and online banks as an alternative
But there is often a way out. About Finance online stores and online banks, you can often get actively managed funds with no or a greatly reduced issuance fee. This purchasing source also often offers cheaper “Insti tranches” that banks and savings banks do not offer or only offer for very high minimum investment amounts. Fund stores work with fund banks such as FNZ Bank or Fondsdepot Bank. Some stores even share the refunds they receive from fund companies with fund investors.
However, not every online bank offers all tranches of a fund, as we showed above in the DWS Top Dividende example. Additionally, some tranches can be traded but cannot be used for a savings plan.
Tip: In Fund Finder, our Fund DatabaseWe offer appropriate filters, for example to find funds compatible with savings plans at certain online banks.
Fund currency is a minor issue
Many funds are available in different currencies, for example euros, US dollars or Swiss francs. But this says nothing about the fund’s currency risk. Whether investors purchase a fund’s share class in dollars or euros makes little difference to the performance of their investment. There is one main reason why German private investors buy a tranche in the national currency, the euro: there is no need to exchange currencies during the purchase, which means there are no currency conversion costs. Typically, this amounts to 0.5 to 1 percent of the purchase cost.
Currency hedging is generally unnecessary
The tranches of a currency-hedged investment fund – they often have the suffix “Hdg” for the English word hedged in their name – also count as part of the same assets of the fund. In our Fund Database However, they are not listed in the normal fund groups, but rather grouped together in their own groups. In contrast to the fund’s currency, there are sometimes large differences in performance, sometimes to the benefit, sometimes to the detriment, of investors. We are currently maintaining protection against exchange rate risks Broadly diversified equity funds around the world unnecessary in the long term. Furthermore, these installments are a little more expensive. However, for certain national funds and for a relatively short investment period of a few years, a covered tranche may make sense.
Fund Database Tips
Tip 1: We define a main tranche for each fund with multiple share classes in our database. For the DWS Top Dividend mentioned above, it is the LD tranche. If you are in Fund Finder If you would like to limit the selection to the main tranches for an easier overview, select below >More filters >Share classes >Show only one share class per fund.
Tip 2: If, on the other hand, you want to see all share classes of a specific fund, proceed as follows: Access the individual view of a tranche, for example, via the Isin search on the fund finder home page. Then scroll down to the “Financing Alternatives” section below the point cloud. There, click on “Show all fund share classes”. You will then be presented with a tabular overview of all share classes in the fund, including those in other fund groups if necessary.