Many people invest in mutual funds for the convenience and built-in diversification. But as an investor, you should know that mutual funds typically come with different share classes, which could impact the fees you pay for your investments.
When a mutual fund offers different share classes, each class represents an interest in the fund's portfolio but charges its own distinct set of fees. Class A shares, for example, come with a high up-front sales charge but lower fees throughout the life of your investment. It's important to understand the meaning behind each share class before you choose the one that's right for you.
Mutual fund fees
Fees are a part of any mutual fund investment, and they're largely based on the share class you select. Most mutual funds impose sales charges and annual fees on investors. The sales charge is what you'll pay when you buy (or sell) shares of the fund, while the annual investment fee covers the costs of operating and maintaining the fund. These fees may be lower or higher depending on the share classes you buy.
Class A Shares
When you buy Class A shares, you'll typically face a higher up-front sales charge but pay lower annual fees. Furthermore, you may get a discount on your up-front sales charge if your initial investment meets a certain threshold. Class A shares are often appropriate for investors who plan to hold their shares for a longer period of time.
Class B Shares
When you buy Class B shares, you won't pay the same up-front sales charge you would with Class A shares. However, your annual fees will most likely be significantly higher over time than the fees you'd pay for holding Class A shares. Class B shares also come with a contingent deferred sales charge (CDSC), which is a fee that applies if you sell your shares within a certain timeframe that differs by fund. Once that time period expires, Class B shares will generally convert automatically to Class A shares.
Class C Shares
When you buy Class C shares, you won't pay an up-front sales charge. Like Class B shares, Class C shares come with a CDSC, but whereas Class B shares convert to Class A shares once that CDSC period is over, Class C shares don't. Furthermore, Class C shares typically charge higher annual fees than Class A and Class B shares.
Finding the right investment for you
When choosing between different mutual fund share classes, it's best to keep two factors in mind:
- The amount of money you're looking to invest
- The length of time you're planning to invest
These factors can help you determine which share classes make the most sense financially. Remember, your goal in choosing a share class should be to pay the least amount of money in fees over the life of your investment. It might, for example, make sense to choose Class A shares and pay a higher up-front fee if that cuts your annual fee for a lengthy period of time. On the other hand, if you're not looking to invest for much more than a year, you might come out ahead by opting for Class C shares. There's no hard-and-fast rule as to which mutual fund share class is the better choice, so be sure to run the numbers as they apply to your personal financial situation before making a decision.