Investing in mutual funds sometimes means choosing among different mutual fund classes. One of the main differences among these classes is how much you’ll pay in expenses and how much your investment professional will be paid for selling you the fund. Before deciding on a share class within a fund, you should understand the differences between them.
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 different fees and expenses depending on its class. Some classes provide rights or benefits that others don’t.
You can find out whether a mutual fund has different classes by looking at the prospectus. When deciding which share class is best for you, carefully consider:
- how long you plan to hold the fund;
- the size of your investment; and
- whether you qualify for any sales charge discounts or other fee waivers.
Your investment professional or your brokerage firm 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.
The most common share classes that you might encounter outside a 401(k) or other retirement plan include:
Class A Shares
Class A shares typically impose a front-end sales charge, which means a portion of your money isn’t 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 $50 (5 percent 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’s generally lower than the charge imposed by the other classes (often 1 percent per year for Class B and Class 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, say 4.5 percent instead of 5 percent, if you invest at least $50,000 in the fund.
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 or firm 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. 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.
Also note that if you buy a mutual fund directly from the fund investment company, you can obtain the low fees of Class A shares but without the load charges or commissions.
Class B Shares
Class B shares typically don’t 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 disappears. 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 don’t 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, might be higher. You also might pay a sales commission when you sell your Class B shares. B shares generally impose a higher 12b-1 fee than what you'd 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 might want to consider (and discuss with your investment professional if you have one) 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 might not be an option for you.
Class C Shares
Class C shares don’t 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 don’t 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, Class 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'll 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 don’t 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 investment 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, typically you'll pay the investment adviser a fee equal to a percentage of your assets in the account for providing ongoing advice to you.
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.
There's no one-size-fits-all when it comes to these shares, so you should talk to your investment professional about what rights and benefits you're eligible for.