TJT Certified Public Accountants

Learning About Mutual Fund Share Classes

Although some mutual funds are “no load,” meaning that there is no sales charge, others are load funds, with some type of sales charge. Many load funds have multiple share classes, with various compensation arrangements. If you’re buying a fund that has more than one share class, you should know which is best for your style of investing.

 Upfront fee

In general, mutual fund “A” shares have a front-end load that’s deducted from your initial investment. Example 1: Wayne Vaughn invests $20,000 in Mutual Fund XYZ, which offers several share classes. This fund’s A shares have a 5% sales commission, which Wayne pays immediately. Therefore, the initial charge is $1,000 (5% of $20,000), and Wayne has $19,000 of XYZ shares in his account. Obviously, starting with a lower account value will hinder your returns. On the other hand, A shares usually have no charge when they’re sold, so shareholders have more flexibility in their investment strategy. In addition, 12b-1 fees, which are ongoing charges for distribution and other services, tend to be relatively low for A shares. In our example, Wayne intends to hold onto XYZ for many years. He is willing to pay an initial charge in order to have no further sales charges and reasonable recurring costs.

 Pay later, not sooner

Investors who prefer to invest $20,000 to buy $20,000 worth of mutual funds might select B shares. These shares impose other charges, though.

• Redemption fee. B shares usually have a contingent deferred sales charge (CDSC), which investors pay if they sell within a certain period of time. Example 2: Terri Smith does not want to pay upfront fees, so she buys B shares of fund XYZ. The fund will impose a 5% CDSC if Terri sells within 1 year. Over time, the CDSC will decline gradually to 4%, 3%, etc. After 6 years, the CDSC will disappear.

• Higher 12b-1 fees. B shares may charge the maximum 12b-1 fee of 1% per year. In our example, Terri will pay that fee for 6 years. At that point, when the CDSC no longer applies, Terri’s B shares will become A shares, with an annual 12b-1 fee of only 0.25% a year.

 Short-term solution

Yet another option is to buy C shares. Not only will you have all your money working for you at the start, you’ll soon be free of redemption fees. Example 3: Stan Roberts puts his money into the C shares of fund XYZ. He accepts a 1% CDSC that will disappear after one year. Stan realizes that C shares charge a maximum 1% 12b-1 fee, year after year, but he doesn’t expect to hold fund XYZ for very long. Stan believes that if he sells the fund after holding for a year or two, he will have paid less in fees than he would have paid with A or B shares. Our office can help you determine which share class of a chosen mutual fund will be best suited for your investment goals.

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