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Mutual Funds: Share Classes

Investing in mutual funds through a broker or other investment professional sometimes means choosing among different mutual fund classes. One of the main differences among these classes is how much you will pay in expenses and how much your broker will be paid for selling you the fund. Before deciding on a share class within a fund, it is important for you to understand the differences between them.

What Are Mutual Fund Share Classes?

A single mutual fund, with one investment 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 mutual fund will charge you different fees and expenses depending on the class you choose. Some classes provide rights or benefits that others do not.

When deciding which share class is best for you, carefully consider:

  • How long you plan to hold the fund.
  • The size of your investment.
  • Whether you qualify for any sales charge discounts or other fee waivers.

You can find out whether a mutual fund has different classes by looking at the prospectus. The most common share classes — A, B, C, and Transaction (or “clean”) shares — that retail investors might encounter outside a 401(k) or other retirement plan are described below.

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 managing the fund’s portfolio, or marketing and distribution). These fees and expenses can vary widely from fund to fund or fund class to fund class. Even small differences in expenses can make a big difference in your return over time.

When choosing among different mutual fund share classes, be aware that your investment professional might receive higher (or lower) commissions or payments from the sale of one share class relative to another. You can use FINRA’s Fund Analyzer to see the impact of these fees over time on your account value — and to assess which share class might be best for you, given your goals, investment amount, and expected holding period.

Here are the most common differences among shares of mutual funds:

Class A Shares

Class A shares typically impose a front-end sales charge, which means a portion of your dollars is not invested, and is instead paid in part to the brokerage firm selling you the fund. 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 (5% of $1,000) 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 Class B and C shares).

Depending on the size of your purchase, the mutual fund might offer you discounts, called breakpoints, on the front-end sales charge. For example, a fund may charge a smaller percentage front-end sales charge (4.5 percent instead of 5 percent if you invest at least $50,000 in the fund. There are different ways you can qualify for a sales charge breakpoint. Often you can qualify for a breakpoint in your sales charge if you:

  • Make a large purchase.
  • Already have investments in the same fund or other mutual funds offered by the same fund family, which count toward the investment amount needed to get a breakpoint (Rights of Accumulation).
  • Have family members (or others with whom you may link according to fund rules) who have invested in the same fund family.
  • Commit to regularly purchasing the mutual fund's shares over a specified time period with a Letter of Intent (LOI).

Another way to invest in Class A shares without paying a front-end sales charge is by exchanging your investment in one fund for an investment in another fund in the same fund family. For example, let’s say you redeem (sell) $25,000 of your Class A Shares of the ABC Growth Fund and invest the proceeds in Class A Shares of the ABC International Fund. Since you already paid a sales charge when you invested in the Growth Fund, you won’t be charged a new sales charge for your $25,000 investment in the International Fund.

Always ask your investment professional whether any breakpoint discounts or sales charge waivers are available to you.

Class A shares also charge management fees and 12b-1 fees. Management fees are the same for all share classes of any fund, but different funds often have different management fees. However, 12b-1 fees for Class A shares are generally lower than the 12b-1 fees for class B and C shares. Because of lower 12b-1 fees, total operating expenses on class A shares, over time, are generally lower, too.

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. B shares generally impose a 12b-1 fee that is higher than what you would incur if you purchased class A 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.

Most mutual funds no longer offer Class B shares, so they may not be an option for you.

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. Unlike B shares, they typically do not convert to class A shares and, instead, continue to charge higher annual expenses (including 12b-1 fees) for as long as the shares are held.

Like class B shares, C shares typically impose higher annual operating expenses than class A shares due, primarily, to higher 12b-1 fees.

Class C shares may be less expensive than class A or B shares if you have a shorter-term investment horizon because you will pay little or no sales charge. However, your annual expenses could be higher than class A shares, and even class B shares, if you hold your shares for a long time.

Transaction (“Clean”) Shares

"Transaction Shares" is a term that applies to a class of fund shares without any front-end load, deferred sales charge, 12b-1 fees, or other asset-based fee for sales or distribution. Even though Transaction Shares do not impose any sales charges, in some cases, a brokerage firm may separately require you to pay a sales commission when you invest in these shares. If your trades generate a commission, work with your financial professional to estimate your trading frequency (also called annual turnover) for the fund. This frequency may be related to how often you rebalance, reallocate, or redeploy assets in your portfolio. Also, if you invest in Transaction Shares through an investment advisory account, normally you will pay the investment adviser a fee equal to a percentage of your assets in the account for providing ongoing advice to you. 

There is no one-size-fits-all when it comes to these shares, so you should talk to your financial professional about what rights and benefits you are eligible for. It is also important to know that with Transaction Shares, some brokerage firms may not offer sales charge breakpoint discounts or waivers that would be available if you invested in Class A Shares, such as through rights of accumulation, letters of intent, and exchanging shares of one fund for shares of another fund in the same family.

FINRA Fund Analyzer

One of the best ways to evaluate a fund, compare share classes, and especially to compare costs and fees, is to use FINRA’s Fund Analyzer. The Fund Analyzer helps both investors and financial professionals understand the impact of fees and potential available discounts on mutual funds, exchange-traded funds, exchange-traded notes and money market funds. The Fund Analyzer allows you to sort through and compare more than 30,000 products and calculates how a fund's fees, expenses and discounts impact the value of a fund over time. With a focus on the impact of fund fees and expenses as well as account-based fees, you can better determine which funds might best meet your investing needs at the lowest cost while providing the best value. See our overview of the Fund Analyzer and the different comparisons that can be modeled in the tool.