Mutual funds come in a variety of categories. Class A, Class B, and Class C funds are the primary categories among funds that charge sales fees. Each class has a unique fee structure.
Categories of Mutual Funds
The core categories of Class A, Class B, and Class C funds are the main categories of mutual funds that charge sales fees. Each class has its own benefits for different investment strategies. Class A involves paying a fee when purchasing shares. Class B charges a fee when selling shares. Class C imposes fees while holding shares, such as 0.5% of the share’s value during the period.
Basics of Mutual Fund Classes
Class A funds charge what is known as “front-end load,” meaning you will pay a percentage of the purchase amount every time you buy shares. Front-end loads can be as high as 5% or more. For example, if you purchase a Class A mutual fund with a front-end load of 5%, and you are buying $10,000 worth of shares, you would pay $500 as a front-end load. In other words, you will only invest $9,500, not the $10,000 you are paying.
Class B funds charge “back-end fees,” also known as “contingent deferred sales charges” (CDSC). These shares are the opposite of Class A, which means you will pay a percentage of the dollar value for shares sold. You do not pay any upfront fees, but you will pay when selling.
Fortunately, back-end fees gradually decline while holding the fund, eventually reaching zero. However, one downside of Class B funds is that they often carry what is known as “12b-1 fees,” which increase the fund’s expenses. 12b-1 fees are paid from the assets of the mutual fund or exchange-traded fund to cover distribution costs (marketing and selling shares of the mutual fund) and sometimes to cover costs associated with providing shareholder services. The 12b-1 fee gets its name from the securities rule that allows the mutual fund to charge it.
Class C funds impose what’s called a “level-load fee,” meaning there are ongoing fees, such as 1% annually as long as you hold the fund. This increases the fund’s expenses and reduces returns over time. These shares may also charge 12b-1 fees.
Special Considerations
Class A funds may offer more flexibility in their fees, especially if you invest a large amount upfront. Check with your broker or investment advisor to see if the mutual fund you are interested in offers discounts, also known as “breakpoints.” In addition to breakpoint opportunities for large investments, you may also qualify for breakpoints if you have already invested in another fund from the same mutual fund company or if you commit to investing regularly over a specified time period.
According to the U.S. regulatory body, many Class B mutual fund companies no longer offer them. You may have difficulty finding these types of shares even if you decide they are best for you.
Regarding Class C funds, you will see annual fees imposed on your holdings, but the fees are usually lower because they are charged annually. This may make the overall cost of fees lower for short-term investors.
Note: Despite some short-term advantages, some Class C funds impose additional fees on sellers if they sell within a very short time frame, such as one year.
Which One is Right for You?
The reason
The main reason to buy Class A, Class B, or Class C shares in mutual funds is that you use a financial professional who is paid a commission for the advice they give you. If you are buying load funds, here is the basic idea of what is best for you.
When Class A shares are best:
- Long-term investors (at least more than five years, preferably more than 10 years) will perform best with Class A funds. Although the upfront fees may seem high, the ongoing internal expenses for Class A funds are lower than those for Class B and C shares.
When Class B shares are best:
- If you think you will sell your shares in about five to seven years, and you find a Class B mutual fund that charges a sales fee that decreases each year, then Class B shares can be a good idea, as you won’t pay any fees to buy the investment and will pay little or nothing at sale. Just make sure the expense ratio isn’t too high (ideally not exceeding 1%).
When Class C shares are best:
- This class is typically the best idea when you hold mutual fund shares for a short period (more than one year but less than three years). The ongoing annual fees become expensive over time, even if they are relatively low, which is why Class C shares are best for one to three years.
Note: The most common classes of mutual funds are Classes A, B, and C, but there are many other classes of mutual funds, including Classes D, I, K, R, and Z.
Alternatives to Class A, B, and C Shares in Mutual Funds
The main point to note about mutual fund classes is that if you are an investor managing your own investments, the best class for you isn’t an actual class – it’s no-load funds. Sometimes, mutual fund companies may label no-load funds as “investor shares.”
No-load funds generally have lower expense ratios and no fees (sales loads) to pay upfront or at the end. Lower costs can lead to higher returns over time since more of your money stays in the fund instead of leaking into the hands of a broker or mutual fund company.
Conclusion
The main differences between the different classes of mutual funds are their fee structures. Paying fees or sales loads should make sense when you are receiving advice from a financial professional who is compensated by commission. Most importantly, investors should try to keep costs as low as possible and choose funds that align with their investment goals and risk levels.
Frequently Asked Questions (FAQs)
When are mutual fund trades executed?
Mutual fund trades are executed after the market closes. The exact timing of execution depends on the company managing the fund, but you can generally expect your order to be executed in your account at any time between 4 PM and 8 PM Eastern Time.
How many mutual funds should I own?
The number of mutual funds needed to create a balanced portfolio depends on the types of mutual funds you are using. If you are using targeted funds that achieve very narrow investment goals, you will need more of them to diversify your portfolio. If you are using a broad index fund or a balanced target-date fund, you may only need one or two. It also depends on how much diversification you want in your portfolio.
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The Balance offers tax, investment, or financial services and does not provide advice. The information is provided without regard to the specific investment goals, risk tolerance, or financial circumstances of any particular investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of capital.
Sources
The Balance only uses high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Office of the Investor Education and Advocacy. “Distribution [and/or Service] (12B-1) Fees.”
U.S. Securities and Exchange Commission. “Mutual Funds: Share Classes.”
Source: https://www.thebalancemoney.com/is-it-best-to-buy-a-b-or-c-shares-4039035
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