Many mutual funds offer more than one class of shares. Fund companies can divide the type of shares they offer into different classes based on the types of sales charges. For example, a fund may offer Class A and Class B shares in the same mutual fund. Each class will have the same holdings or investment portfolio of securities and will have the same investment objectives and policies. But each class will have different sales costs, fees, and expenses. These varying shareholder services and distribution arrangements with different fees and expenses will impact the NAV and total return of each share class.
Because the SEC prohibits funds from charging different ongoing expenses to different investors within the same fund, some funds have established several classes within the same fund type. For instance, a fund complex may have Class A, B, C, of its money fund. Although each class is a money fund, the different fund classes can charge different contracted fees, waivers, and loads and offer slightly different services or different initial investment levels.
Mutual fund companies offer different share classes to reach investors who buy the shares through different sources. The different classes allow the investor to also evaluate their needs, including the length of time that they expect to hold an investment in the mutual fund. A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example, one class may be sold through brokers with a front-end load, and another class may be sold direct to the public with no load but a 12b-1 fee included in the class’s expenses, sometimes referred to as Class C shares. Still a third class might have a minimum investment of $10,000,000 and be available only to financial institutions a so-called institutional share class. In some cases, by aggregating regular investments made by many individuals, a retirement plan such as a 401(k) plan may qualify to purchase institutional shares even though no members of the plan would qualify individually. As a result of these structures, each class will likely have different performance results.
Mutual funds that offer multi-class structures are generally established to provide investors the ability to select a fee and expense structure that is most appropriate or fits for their investment goals and needs. The goals and needs should include the time that they expect to remain invested in the fund. Some of the key characteristics of the most common mutual fund share classes offered to individual investors include:
Class A Shares. Class A shares typically impose a front-end sales load. They also tend to have a lower 12b-1 fee and lower annual expenses than other mutual fund share classes. Be aware that some mutual funds reduce the front-end load as the size of your investment increases. Investors that are considering Class A shares should inquire about breakpoints.
Class B Shares. Class B shares typically do not have a front-end sales load. Instead, they may impose a contingent deferred sales load and a 12b-1 fee, along with other annual expenses. Class B shares also might convert automatically to a class with a lower 12b-1 fee if the investor holds the shares long enough.
Class C Shares. Class C shares might have a 12b-1 fee, other annual expenses, and either a front- or back-end sales load. But the front- or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively. Unlike Class B shares, Class C shares generally do not convert to another class. Class C shares tend to have higher annual expenses than either Class A or Class B shares.
The SEC does require that a fund offering multiple share classes provide an analysis of the comparative costs in the fund’s prospectus.
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