The Fundamentals of Share Classes in Mutual Funds

There are several different share classes available for mutual funds. The major share classes offered by funds that impose sales loads are designated as A Class, B Class, and C Class shares, respectively. There is a different fee structure associated with each of the shares individually.

Fees

When you acquire shares in a fund that contains Class A shares, you will be subject to what is known as a "front load," which means you will be charged a fee equal to percentage of your total purchase price. A front load of up to 5% or greater is possible. For instance, if you purchase an A share mutual fund with a front load of 5% and acquire $10,000 worth of shares, you will be required to make an initial load payment of $500. To phrase it another way, you will wind up investing $9,500 instead of the whole $10,000 you initially spent.

A "back-end load," also known as a "contingent delayed sales charge," is a fee that is assessed on Class B share funds (CDSC). These shares are the inverse of class A shares, which means you will be responsible for paying a proportion of the total dollar value of sold shares. You are not required to pay any fees when you buy, but you will have to pay when you sell.

You will be relieved that the back-end burden will progressively go down as you continue to hold the fund, and it will finally fall down to zero. One disadvantage of B share funds is that they often contain something referred to as a "12b-1 charge," which contributes to an increase in the fund's overall expenses. The expenses of distribution, which include promoting and selling mutual fund shares, and occasionally the costs of providing shareholder services are covered by the 12b-1 fees that are paid out of the assets of mutual funds and exchange-traded funds (ETFs). 12b-1 fees were given their name by the Securities and Exchange Commission regulation that permits investment funds to charge them.

Class C share funds levy what is known as a "level load," which translates to a continuous cost, such as 1% yearly for as long as you continue to retain the fund. This price is charged regardless of how long you keep the fund. This causes the fund's expenses to rise, resulting in lower returns over the long term. Additionally, 12b-1 fees can apply to these shares.

Special Considerations

The Financial Industry Regulatory Authority reports that many mutual fund firms have discontinued the distribution of class B shares. Even if you conclude that these kinds of shares are the greatest option, you may have difficulty locating them.

Regarding class C shares, yearly expenses will be imposed on your holdings; however, the fees are normally lesser since they are paid annually. Because of this, the total fee cost for investors with a short-term horizon could be reduced.

Which Is the Best Option for You?

When you acquire A shares, B shares, or C shares via a mutual fund, the principal benefit you get is the assistance of a financial expert who is paid on a commission basis for the advice they offer to investors like you. The following is a quick rundown of what options are ideal for you if you invest in loaded funds.

When A Shares Are Best

Class A share funds are the most advantageous for investors looking to hold onto their investments for at least five years, ideally more than ten. Class A share funds often have lower continuing internal expenses than B and C, even though the front load may seem higher than those of the other share classes.

When B Shares Are Best

If you are convinced that you'll sell your shares within 5 to 7 years, and you come across a Class B investment fund with load fees at the back that is decreasing each year, buying B shares might be a good option. This is because you won't be required to pay any charges to invest in the fund, and you'll pay low or nothing to trade your share. Ensure that your expenditure ratio isn't excessively high (ideally, it shouldn't be greater than 1 percent) and that you don't draw too much on your account.

When C Shares Are Best

When you plan to keep your shares in a mutual fund for a relatively short time, investing in this share class is often a good decision (more than one year but less than three). Class C shares should only be held for one to three years since the continuous yearly fees become more costly with time, even if they are relatively inexpensive initially.