As an investor, you may have read about “Class A,” “Class B,” Class C,” or other classes of mutual fund shares. It is important for any investor to understand the differences between the classes of mutual fund shares because they can be significant in determine which class is right for you.
The following is a brief summary on the different types of mutual fund classes.
What Are Mutual Fund Classes?
Typically mutual fund offer more than one “class” of its shares to investors. Each class represents a similar interest in the mutual fund’s portfolio but the principal difference between the classes is that the mutual fund will charge the investor different fees and expenses depending on the class you choose.
What Types of Fees and Expenses Will I Pay?
If You Buy Class A Shares:
Class A shares typically charge a front-end sales charge. When you buy Class A shares with a front-end sales charge, a portion of your dollars is not invested. 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 1.00 percent per year for B and C shares).
A mutual fund may also 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; or
• commit to regularly purchasing the mutual fund’s shares.
If You Buy Class B Shares:
Class B shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges that may be higher than those that you would pay if you purchased Class A shares. Class B shares also normally impose a contingent deferred sales charge (CDSC), which you pay if you sell your shares within a certain period, often six years. For this reason, these shares should not be referred to as “no-load” shares. 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.
Class B shares do not impose a sales charge at the time of purchase. So unlike Class A purchases, all of your dollars are immediately invested. But your annual expenses, as measured by the expense ratio, may be higher. You also may pay a sales charge 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 financial adviser 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 do not plan on holding the investment long term, B shares may not be appropriate for you. If your financial advisor is recommending a B share mutual fund as opposed to an A share, this may be because the commission to the financial advisor for selling a B share mutual fund is greater than if he/she sold you an A share.
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 1.00 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.
If you have questions about a mutual fund you purchased, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office at 312-238-9650.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
To learn more about The White Law Group, visit http://www.whitesecuritieslaw.com.