Most investors know about mutual fund expenses like, load funds, no-load funds, 12b-1 fees, but less well-known is the fact that funds are also separated into classes based largely on those fees.
Though a fund may be split into different classes, all classes can still have identical portfolio mixes. However, since the fees for each share class are different, investment returns will vary from one class to another.
There several different mutual fund classes but below we are discussing the most common. The first three — Classes A, B, and C — are for individual investors.
1. Class A Mutual Funds
Class A fund shares usually charge a front-end sales load along with a small annual 12b-1 fee (12b-1 fees cover marketing and distributions costs, as well as investment adviser, transfer agent, custodian and administrator fees for a mutual fund.) They also require a larger initial investment than Class B or C funds.
Because of the up-front load requirement, Class A funds will offer discounts on the load based on the amount of the initial investment.
This is referred to as breakpoints, which you can think of as tiered pricing — the higher the investment that you make, the lower the upfront load will be.
In addition to the size of your initial investment, breakpoints will also factor into other mutual funds that you hold the same fund family, the frequency of your purchases, or even whether or not you have family members with an investment in the same fund family.
Because of the up-front fee, Class A fund shares are better suited for a long-term investment. This will give you an opportunity to recover the front-end load, in addition to the fact that 12b-1 fees are lower than what they are for other classes of funds.
2. Class B Mutual Funds
Class B funds are also load funds, except that the load is charged on the back end rather than front. This load is sometimes referred to as a contingent or deferred-sales charge.
The load on Class B funds can be high, however they typically decline over a space of several years. The longer you hold your fund position, the lower the load will be, and typically disappearing completely after 6 years.
The 12b-1 fees on Class B funds are higher than what they are on Class A funds, but once the back-end load fee provision disappears, the shares can be converted to Class A shares with their lower 12b-1 fees.
Because of the high back-end load on Class B shares, this class is best held for long-term investment, or at least until the load contingency disappears.
3. Class C Mutual Funds
Class C funds have high 12b-1 fees and may or may not have a front-end load, but if they do, it is much smaller than for Class A funds. Like Class B funds, they usually have a back-end load, which is typically only 1 percent.
The back-end load will usually disappear once you have held the fund for at least one year (but sometimes for as long as two years). Unlike Class B funds, Class C funds usually do not convert to Class A funds like way Class B funds will.
Because of the lower up-front load — if there is one at all — Class C mutual funds are usually better suited to shorter-term trading. This is especially true if the back-end load disappears after one year; you can hold onto the fund for one year, then sell without incurring any load charges.
4. Class I and Class R Mutual Funds
Class A, B and C mutual funds are specifically for individual investors, but there are other classes, called Class I and Class R funds, that are set up primarily for institutional investing.
Class I funds are no-load funds that do not charge 12b-1 fees. They also have very high initial investment requirements because they are setup primarily for institutional purposes.
Class R funds are also no-load funds, but they do charge small 12b-1 fees. Class R funds are typically for retirement plans, such as 401(k), 403(b) and 457 plans.
The information, as to which share Class A mutual fund falls into, is available in the fund’s prospectus. But most of us ordinary folks are far more likely to segregate mutual funds into load versus no-load funds, or even front-load versus back-load.
Types of Mutual Fund Classes
Now that you’re aware of the different mutual fund classes, and what each class involves, you’re better prepared to start investing in mutual funds! Whether you’re an individual investor or looking for company investing, you can find a mutual fund that works best for your needs.
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