When it comes to mutual funds and stocks, not all shares are created equal. In fact, shares are frequently broken down into different classes, each with its own set of consequences from an investment standpoint.
Share classes are special designations applied to stocks and mutual funds. There are three main types of share classes that are popular among mutual funds: Class A, Class B, and Class C. Each class comes with its own benefits and drawbacks.
Importance of share classes
When it comes to stocks, different share classes come with different voting rights. When it comes to mutual funds, however, the class of shares you own will dictate the type and number of fees you're charged for your investment.
Most mutual fund fees consist of sales charges and annual fees. The sales charge, also called a load, is the commission you pay when you buy or sell shares of the fund. The annual fees, meanwhile, cover the fund's operating expenses, which include management fees, distribution and service fees (also known as 12b-1 fees), and administrative fees. It's important to understand what type, or class, of shares you're looking at, as it can have an impact on your ultimate investment gains.
Class A shares
Class A shares involve a front-end, or up-front, sales charge that is deducted from your initial investment. This means that, when you buy Class A shares, a portion of your investment is actually not invested, but rather applied to the sales charge. You may, however, get a discount on your front-end sales charge if you invest a larger amount, commit to buying more shares on a regular basis, or already hold other mutual funds offered by the same fund family.
Additionally, Class A shares often impose an asset-based sales charge, but one that is typically lower than the charges imposed by Class B and Class C shares. If you intend to hold your shares for a longer period of time, Class A might be your most cost-effective option.
Class B shares
Class B shares do not involve a front-end sales charge, but they do impose an asset-based sales charge that is significantly higher than what Class A shares charge. Class B shares also usually impose what's known as a contingent deferred sales charge (CDSC), which is a fee that applies if you sell your shares within a certain time frame.
Once that time frame expires and the CDSC goes away, Class B shares often automatically convert into Class A shares. When that happens, you get the benefit of the lower fees that come with Class A shares.
If you don't have a lot of money to invest -- and therefore can't get a discount on the up-front sales charge for Class A shares -- you may want to look at Class B shares, especially if you think you'll hold them long enough to avoid the CDSC.
Class C shares
Class C shares also don't involve a front-end sales charge, so unlike Class A shares, every dollar you put into your investment is actually invested from the start. However, Class C shares do impose a CDSC if you sell them within a certain time frame (though the CDSC is generally lower than that of Class B shares).
The major drawback of Class C shares is that they usually impose higher asset-based sales charges. Unlike Class B shares, Class C shares do not typically convert into Class A shares over time, so those higher charges stay in place as long as you hold the investment. It's often the case that, if you hang onto Class C shares for a long time, your total cost will be higher than it would be with Class A or Class B shares. You might, however, consider Class C shares if you're looking to invest a large sum of money for a shorter period of time.
Because each mutual fund share class has its own set of pros and cons, it's important to run some numbers to see what makes the most financial sense. To truly maximize your gains, you'll need to identify the option that will ultimately cost you the least amount of money in overall fees over the life of your investment.
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