Definition of Class B Investment Fund Shares
Class B investment fund shares are one of the share classes that investors can purchase when investing in an investment fund. These shares do not require front-end sales loads (unlike many Class A shares), but they often impose charges upon selling the shares. Therefore, Class B shares are also known as back-end load shares.
How Class B Investment Fund Shares Work
Class B investment fund shares do not require front-end sales loads but carry a contingent deferred sales charge (CDSC) upon sale and generally higher marketing and distribution fees (12b-1 fees) than other investment share classes. The 12b-1 fees are paid by investment funds to brokers to compensate them for marketing and selling fund shares. CDSC is charged to shareholders who sell their shares in the fund during the surrender period.
Class A vs Class B vs Class C
When comparing different classes of investment fund shares, a variety of scenarios may present themselves that make Class B investment fund shares appear more attractive than other share classes within the same fund. However, one should remain cautious when using hypothetical scenarios to determine the best investment for one’s portfolio.
Pros and Cons of Investing in Class B Investment Fund Shares
There will always be advisors, and perhaps even investors, who want to discuss whether choosing Class B investment fund shares is a bad decision, arguing that they may be suitable for investors under certain conditions. On the positive side, Class B shares do not require front-end sales loads and may convert to Class A shares if held for long enough.
What Class B Investment Fund Shares Mean for Individual Investors
Despite the profitability potential for advisors, some investment funds have indeed phased out Class B shares from their offerings over the years. This may be due to more knowledgeable investors regarding investment funds or more stringent compliance departments in brokerage firms. Whatever the reason, you may find that Class B investment fund shares are no longer offered by a particular investment fund.
If you have the opportunity to invest in Class B investment fund shares, be cautious and make sure to conduct the necessary research before purchasing. It may also be wise to establish your exit strategy in case you need to sell at any point. If you need to sell a particular Class B investment fund share sooner than you expected, you might be able to convert from one fund to a Class B of another fund in the same family without incurring surrender penalties (though you may incur capital gains and exchange fees). The question arises as to whether the fund family from which you purchased your original investment fund shares has another appropriate investment fund. Will you have to settle with a average fund to avoid surrender fees?
Key Takeaways
Class B investment fund shares are characterized by having no front-end sales loads, but they impose high charges upon sale known as contingent deferred sales charges (CDSC) if the shares are not held for long enough. The CDSC for Class B investment fund shares typically decreases over time and may be eliminated after holding the shares for seven years. Some Class B investment fund shares retain the option to convert to Class A shares (which do not impose surrender charges and have lower 12b-1 fees) during that timeframe.
Source:
https://www.thebalancemoney.com/mutual-fund-class-b-shares-good-buy-or-goodbye-2466480
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