Mutual Fund share classes may differ by their internal expenses, potential front-end or back-end sales loads, investment minimums, and availability to different types of investors.  The primary difference between each share class is the fees and expenses associated with each class of shares. Each class represents a similar interest in the portfolio.  Investment companies with more than one class of common stock usually identify a specific class with an alphabetic indicator, such as “Class A Shares” or “Class C Shares.”  The differences between each class affects investment returns over time.

Class A Shares

Class A shares typically charge a front-end sales load at the time of purchase.  This means that a specific percentage of your initial investment is taken out as a commission, so a portion of your dollars is not invested.

Pros to investing in Class A shares:

  • Class A shares are subject to lower 12b-1 fees than Class C shares, so the shareholders usually pay lower expenses and receive higher dividends. As a result, Class A shareholders usually see higher returns than Class C and Class B shares, but lower returns than Institutional Class shareholders.
  • These shares may also provide a discount off regular front-end sales load rates each time your investment reaches a certain breakpoint.
  • You may not pay an initial sales load if Class A shares are purchased by reinvesting dividends and distributions or if the Class A shares are exchanged for another series in the same family of funds.

Cons to investing in Class A shares. If investors do not have the funds to reach a breakpoint before a specified deadline, they may have to pay the regular front-end sales load.  Investment is also not advantageous if investors have a short time horizon.  You may actually lose money by liquidating early.

Class B Shares

Class B shares are a classification of common stock that typically carry contingent deferred sales loads (CDSL), or back-end sales loads.  This share class may also impose asset-based sales charges that are higher than those for Class A shares.  Investors do not pay anything upfront, but rather a charge when shares are sold, depending on how long you hold them.

The expense ratios for Class B shares are typically much higher than other share classes.  There are also no breakpoints on the contingent deferred sales charge, so there is no discount offered on these charges.

Pros to investing in Class B shares:

  • There is no front-end sales load, so your entire investment earns interest income.  The longer you hold your shares, the lower the contingent deferred sales charge.
  • Class B shares automatically convert to Class A shares after a certain period of time, which is beneficial because Class A shares have a lower annual expense ratio.
  • Class B shareholders typically see lower returns than Class A and Institutional Class shareholders due to the CDSL.

Class C Shares (also referred to as Retail Class Shares)

Class C shares are a classification of common stock that have a level load.  They do not have front-end sales loads, but these shares have small back-end sales loads.

Class C shares typically have higher annual expense ratios than Class A shares but lower expense ratios than Class B shares.  Therefore, shareholders usually pay higher annual expenses and receive lower dividends than Class A shareholders.  There is no conversion of shares like with the Class B shares, so they cannot be converted into Class A shares for the opportunity to lower the annual expense ratios.  The investment returns may also be reduced the longer you stay invested because the fees add up over time.  There are usually no breakpoints offered on the Class C shares.

Pros to investing in Class C shares:

  • These can be a good option for investors who want to sell their shares after a short period of time but will hold the shares for at least one year.
  • There are no front-end sales loads, so the entire initial investment can earn interest income and, possibly, result in higher returns.
  • The back-end sales load is typically only 1% for the first year the shares are held.  After the first year, the back-end sales load is usually removed.
  • Class C shareholders usually see lower returns than Class A and Institutional Class shareholders due to the back-end sales load and shorter time duration of shares held.

Institutional Class Shares (also referred to as Class I)

Institutional Class shares are available for sale to investing institutions, usually on a no-load basis.  These typically have sizable minimum investments, so any front-end sales loads are generally waived on these shares. Institutions may buy a significant number of shares in this class at any one time, so they can receive breaks on commission charges.  This share class does not include a 12b-1 fee.  The Institutional Class shares may be offered for direct investment by investors as part of a pension or profit sharing plan, employee benefit trust, endowments, foundations, and corporations.