Here’s what you need to know about choosing between these mutual fund share classes.
Basics of Mutual Fund Share Classes
Class B share funds charge a “back-end load,” also called a “contingent deferred sales charge” (CDSC). These shares are the opposite of class A shares, which means you’ll pay a percentage of the dollar value of shares sold. You don’t pay any fees upfront, but you do pay when you sell. Fortunately, the back-end load declines gradually while you hold the fund, and eventually the load goes all the way down to zero. However, one drawback of B share funds is that they usually have something called a “12b-1 fee,” which increases the expenses of the fund. 12b-1 fees are paid out of mutual fund or ETF assets to cover the costs of distribution (marketing and selling mutual fund shares) and sometimes to cover the costs of providing shareholder services. 12b-1 fees get their name from the SEC rule that allows an investment fund to charge them. Class C share funds charge what is called a “level load,” which means there is an ongoing fee, such as 1% annually as long as you hold the fund. This increases the expenses of the fund and drags down returns over time. These shares may also impose 12b-1 fees.
Special Considerations
Class A share mutual funds may be more flexible with their fees, especially if you’re investing a large sum at once. Check with your broker or investment advisor about whether or not the mutual fund you’re interested in offers discounts, otherwise known as “breakpoints.” In addition to bulk investment breakpoints, you may also qualify for breakpoints if you’re already invested in another fund from the same mutual fund company, or if you commit to regularly investing over a certain time frame. According to the Financial Industry Regulatory Authority, many mutual fund companies no longer offer class B shares. You may have a hard time finding these types of shares, even if you decide they’re best for you. When it comes to class C shares, you will see annual expenses imposed on your holdings, but the fees are typically lower since they’re charged annually. This could make the overall fee cost lower for short-term investors.
Which Is Right for You?
The primary reason to buy A shares, B shares, or C shares with mutual funds is that you are using a financial professional who gets paid by commission for the advice they provide to you. If you are buying loaded funds, here’s the basic breakdown of what’s best for you.
When A Shares Are Best
Long-term investors (more than five years, at least, and preferably more than 10) will do best with class A share funds. Even though the front load may seem high, the ongoing, internal expenses of class A share funds tend to be lower than those of B and C shares.
When B Shares Are Best
If you think you’ll sell your shares in about five to seven years, and you find a Class B share fund with back-end load fees that decrease every year, B shares can be a good idea, because you won’t pay any load to buy into the investment, and you’ll pay little or nothing when you sell. Just be sure that the expense ratio is not too high (ideally not much higher than 1%).
When C Shares Are Best
This share class is usually the best idea when you’ll be holding your mutual fund shares for a short period of time (more than one year but less than three). The ongoing annual fees get expensive over time, even if they’re relatively low, which is why class C shares are best for one to three years.
Alternatives to Class A, B, and C Mutual Fund Shares
The most important point to make about mutual fund share classes is that, if you are a do-it-yourself investor, the best share class for you is not technically a share class—it’s no-load funds. Sometimes mutual fund companies will classify no-load funds as “investor shares.” No-load funds generally have lower expense ratios, and there isn’t a load (sales charge) to pay on the front end or back end. Lower expenses can potentially lead to higher returns over time, because more of your money is staying in the fund rather than trickling out into the hands of a stockbroker or mutual fund company.
The Bottom Line
The primary differences among the various share classes of mutual funds are their fee structures. Paying fees or sales charges generally makes the most sense when you are getting advice from a financial professional who gets paid by commission. Most importantly, investors should try to keep costs as low as possible and only buy funds that are suitable for their investment goals and risk tolerance. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
