Mutual Fund Class Shares
Millions of individuals invest in load mutual funds. The dizzying, alphabet-soup of classes of mutual fund shares are often a source of consternation to both beginning and even fairly seasoned personal investors. Which fund share class do I need? Does each share class have a different sales charge? How do the various sales charges impact the total return of my investment? For most personal investors, there are 3 classes of fund shares that are of relevant concern: Class A, Class B and Class C. Sales loads in combination with various fees can work to reduce your total rate of return. Distinguishing between the various classes of mutual fund shares, particularly with regard to sales loads and fees, is just one critical measure in the selection process of an appropriate fund.
Class A Shares: In order for an investor to purchase Class A shares, the mutual fund company will charge a “front-end load” (sales commission). For example, on a hypothetical investment of $10,000, the “front-end load” could be 5% on Class A shares. After deducting the cost of the sales commission, the amount that will be invested in the fund is $9500! The front-end load varies among mutual fund companies. However, it cannot exceed 8.5%.
Key Points:
• Lower annual expenses including the 12b-1 fee as compared to Class B and Class C shares.
• Eligible for breakpoints. Many mutual fund companies offer a breakpoint schedule (discounts) for large purchases. Depending on the mutual fund company, the breakpoint can begin at the investment level of $25,000 or more commonly at $50,000. Breakpoints may be of special interest to individuals who want to make more substantial investments and take advantage of the reduced sales charge. For example, if you invest $20,000, the front-end load or sales commission charged by the mutual fund company might be 5.75%. However, if you invest $200,000, the sales commission might be reduced to 3.50%. There may not be a sales charge for an investment of $1,000,000 or more.
• Class A shares may be more preferable to individuals with a long time horizon (i.e., buy-and-hold investors).
• Combination Privilege – an individual may qualify for a reduced sales charge by combining separate investments (totaling of shares among all funds to calculate the sales charge) within the same fund family to reach the breakpoint level.
• Rights of accumulation.
• Letter of intent. In order to qualify for a reduced sales charge, an investor can sign a letter of intent, agreeing to make the necessary contributions over a 13-month time frame in order to reach the breakpoint level.
Class B Shares: This class of fund shares is characterized as having a “back-end” load since a sales charge is assessed upon exit (when the shares are redeemed). The back-end load is often referred to as a “contingent deferred sales charge” (CDSC) or sometimes as a “contingent deferred sales load” (CDSL). Interestingly enough, many mutual funds are discontinuing Class B shares as well as Class C shares.
Key Points:
• If the fund shares are redeemed early (generally the fund must be held 6 to 8 years, however, the holding period can vary depending on the mutual fund company), the contingent deferred sales charge must be paid. Investors should check the mutual fund company’s CDSC schedule).
• The contingent deferred sales charge decreases annually and after the specified holding period is eventually reduced to zero. The Class B shares are then converted to Class A which may result in lower annual expenses including 12b-1 fees.
• Usually, the back-end load is not charged on the shares that are derived from reinvested capital gains and dividends.
• Generally do not offer breakpoints.
• Higher expense ratio than Class A shares and may also tend to have comparatively lower dividends.
Class C Shares: These are referred to as “level load” as the mutual fund company charges an annual asset-based fee (typically higher than the fee for Class A Shares).
Key Points:
• Generally cannot be converted to Class A.
• May have higher annual expenses including 12b-1 fees as compared to Class A or even Class B shares.
• Class C shares may be preferred by investors with a shorter time horizon.
• A back-end load is assessed (generally 1%) for early redemption of shares, most often, one year after purchase.
• While the “back-end” load for Class C shares may be comparatively lower, the higher annual expense fees could easily end up being higher than Class A and Class B shares if the fund is held for a considerable length of time.
• Depending on the mutual fund company, there may be specific limits on Class C purchases.
• Are not eligible for breakpoints.
For informational purposes only and not intended as advice. Although every attempt is made at accuracy and completion, the author makes no claims that the content is free of factual errors.
Class A Shares: In order for an investor to purchase Class A shares, the mutual fund company will charge a “front-end load” (sales commission). For example, on a hypothetical investment of $10,000, the “front-end load” could be 5% on Class A shares. After deducting the cost of the sales commission, the amount that will be invested in the fund is $9500! The front-end load varies among mutual fund companies. However, it cannot exceed 8.5%.
Key Points:
• Lower annual expenses including the 12b-1 fee as compared to Class B and Class C shares.
• Eligible for breakpoints. Many mutual fund companies offer a breakpoint schedule (discounts) for large purchases. Depending on the mutual fund company, the breakpoint can begin at the investment level of $25,000 or more commonly at $50,000. Breakpoints may be of special interest to individuals who want to make more substantial investments and take advantage of the reduced sales charge. For example, if you invest $20,000, the front-end load or sales commission charged by the mutual fund company might be 5.75%. However, if you invest $200,000, the sales commission might be reduced to 3.50%. There may not be a sales charge for an investment of $1,000,000 or more.
• Class A shares may be more preferable to individuals with a long time horizon (i.e., buy-and-hold investors).
• Combination Privilege – an individual may qualify for a reduced sales charge by combining separate investments (totaling of shares among all funds to calculate the sales charge) within the same fund family to reach the breakpoint level.
• Rights of accumulation.
• Letter of intent. In order to qualify for a reduced sales charge, an investor can sign a letter of intent, agreeing to make the necessary contributions over a 13-month time frame in order to reach the breakpoint level.
Class B Shares: This class of fund shares is characterized as having a “back-end” load since a sales charge is assessed upon exit (when the shares are redeemed). The back-end load is often referred to as a “contingent deferred sales charge” (CDSC) or sometimes as a “contingent deferred sales load” (CDSL). Interestingly enough, many mutual funds are discontinuing Class B shares as well as Class C shares.
Key Points:
• If the fund shares are redeemed early (generally the fund must be held 6 to 8 years, however, the holding period can vary depending on the mutual fund company), the contingent deferred sales charge must be paid. Investors should check the mutual fund company’s CDSC schedule).
• The contingent deferred sales charge decreases annually and after the specified holding period is eventually reduced to zero. The Class B shares are then converted to Class A which may result in lower annual expenses including 12b-1 fees.
• Usually, the back-end load is not charged on the shares that are derived from reinvested capital gains and dividends.
• Generally do not offer breakpoints.
• Higher expense ratio than Class A shares and may also tend to have comparatively lower dividends.
Class C Shares: These are referred to as “level load” as the mutual fund company charges an annual asset-based fee (typically higher than the fee for Class A Shares).
Key Points:
• Generally cannot be converted to Class A.
• May have higher annual expenses including 12b-1 fees as compared to Class A or even Class B shares.
• Class C shares may be preferred by investors with a shorter time horizon.
• A back-end load is assessed (generally 1%) for early redemption of shares, most often, one year after purchase.
• While the “back-end” load for Class C shares may be comparatively lower, the higher annual expense fees could easily end up being higher than Class A and Class B shares if the fund is held for a considerable length of time.
• Depending on the mutual fund company, there may be specific limits on Class C purchases.
• Are not eligible for breakpoints.
For informational purposes only and not intended as advice. Although every attempt is made at accuracy and completion, the author makes no claims that the content is free of factual errors.
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