Understanding Mutual Fund Classes
As an investor, you may have heard about Class A, Class B, Class C or other classes of mutual fund shares. If you are thinking about choosing one of these classes, it is important for you to understand the differences between them.
What Are Mutual Fund Classes?
A single mutual fund, with one portfolio and one investment adviser, may offer more than one "class" of its shares to investors. Each class represents a similar interest in the mutual fund's portfolio. The biggest difference between the classes is that the mutual fund will charge you different fees and expenses depending on the class you choose.
What Types of Fees and Expenses Will I Pay?
All mutual funds charge fees and expenses, some of which you pay directly (like sales charges and redemption fees) and others that come out of the fund's assets (to pay for such things as marketing and distribution). These fees and expenses can vary widely from fund to fund or fund class to fund class. Because even small differences in expenses can make a big difference in your return over time, we've developed a Fund Analyzer to help you compare how sales loads, fees and other mutual fund expenses can impact your return. Here are the most common differences among Class A, B and C shares of mutual funds:
If You Buy Class A Shares:
Class A shares typically charge a front-end sales charge, which means a portion of your dollars is not invested. Let’s say you spend $1,000 to purchase Class A shares, and the fund imposes a front-end sales charge of 5 percent. You pay the $50 up front and receive shares with a market value of $950. Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes (often 1 percent per year for B and C shares).
Depending on the size of your purchase, the mutual fund might offer you discounts, called breakpoints discounts, on the front-end sales charge if you:
- Make a large purchase.
- Already hold other mutual funds offered by the same fund family.
- Commit to regularly purchasing the mutual fund's shares.
Always ask your investment professional whether any breakpoint discounts are available to you.
If You Buy Class B Shares:
Class B shares typically do not charge a front-end sales charge when you buy shares, but they normally impose what’s called a contingent deferred sales charge (CDSC) if you sell your shares within a certain period, often six years. Sometimes called a back-end load, the CDSC normally declines the longer your hold your shares and, eventually, is eliminated. Within two years after the CDSC is eliminated, Class B shares often "convert" into lower-cost Class A shares. When they convert, they begin to charge the same fees as Class A shares.
Because Class B shares do not impose a sales charge at the time of purchase, all of your dollars are immediately invested—unlike Class A shares. But your annual expenses, as measured by the expense ratio, may be higher. You also may pay a sales commission when you sell your Class B shares.
If you intend to purchase a large amount of Class B shares (over $50,000 or $100,000, for example), you may want to discuss with your investment professional whether Class A shares would be preferable. The expense ratio charged on Class A shares is generally lower than for Class B or C shares. The mutual fund also may offer large-purchase breakpoint discounts from the front-end sales charge for Class A shares.
If You Buy Class C Shares:
Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount that you pay is invested. Often Class C shares impose a small charge (often 1 percent) if you sell your shares within a short time, usually one year. They typically impose higher asset-based sales charges than Class A shares and, since they generally do not convert into Class A shares, those fees will not be reduced over time.
Additionally, in most cases, your total cost would be higher than with Class A shares, and even Class B shares, if you hold for a long time.
- FINRA Fund Analyzer
- Investor Alert—Mutual Fund Breakpoints: A Break Worth Taking
- Investor Alert—Class B Mutual Fund Shares: Do They Make the Grade?