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Tags: finance, stock mutual funds, mutual fund class shares
 A lot of mutual funds offer more than one class of shares. You may have seen a prospectus that shows Class A, Class B or Class C. While each type of mutual fund shares will invest in the same investment portfolio of securities along with having similar investment objectives and policies they offer different shareholder services and/or distribution arrangements and come with their own fee and expense schedules.
This also means that each type of mutual fund shares will also have their own different performance results. Since most funds usually offer three classes of shares, namely A, B, and C, knowing the ABC of mutual fund class shares can help you better understand the various benefits and consequences inherent in each type.
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The first type of mutual fund shares is what’s called the Class A Share. These are typically front end loaded, meaning that you pay a percentage commission when you initially buy into the account you’re investing in. They tend to have lower 12b-1 fees as well as providing a discount off the regular front-end load rates every time your investment reaches a certain amount or breakpoint—be it on the first installment payment or by the second installment payment.
However this type of mutual fund shares does come with a high initial investment requirement and are only good if the portfolio has been a top performer for at least 10 years and you plan on owning the account for a long period of time. The second type of mutual fund shares is what’s called the Class B Share.
These are back-end-loaded, meaning you pay a percentage commission if you decide to redeem them within a certain number of years. The percentage may be higher if you redeem them within the first two years, and may altogether disappear if you redeem by the sixth or seventh year. Since they also automatically convert to Class A after a period of time has elapsed, you get to avail of lower management expense ratios (MER) when this occurs.
However, this type is only for long term investors, since if you withdraw early you get charged the deferred sales charge, and there are no discounts for reaching the break-point, so regardless of how much you invest, you still pay the back end load. And as pointed out earlier, they have a higher MER than the Class A’s.
Finally, the third type of mutual fund shares is what’s called the Class C Share. These are level loaded, meaning that an annual charge is deducted from the investor's account portfolio to help defray the expenses for distribution and marketing. There are no front end fees and the back end load is negligible—usually removed after one year.
They do have lower MER‘s than those of B's, but still higher than those of A’s. They cannot be converted to Class A's, and so if you’re thinking of keeping them for a long time, they are not the best choice because of the high management fees are continuous, as long as you own them.
Also, there are no discounts for reaching the break-point in investment amount. Having different types of mutual fund shares gives you, the investor, the opportunity to pick the fee and expense schedule that you thinks is the most appropriate for you. In deciding which type of mutual fund shares to choose, remember to always read the fund’s prospectus.
Also take into account your investment time-frame, the amount you want to initially invest, how often you will be adding to your investments and also the probability that you will be withdrawing earlier than you expected. Having the proper knowledge in the different classes of mutual fund shares will help prevent you, an investor, from turning into a gambler of your investments.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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