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"A" Share Class Vs. Institutional Share Class

Lower costs can help improve mutual fund performance.

Lower costs can help improve mutual fund performance.

When you pool your money with other investors into a mutual fund, the combined investment portfolio is grouped according to a certain class of mutual funds. Classes are characterized by different fees and commissions you pay, distribution arrangements, shareholder services and voting rights. A primary difference between an “A” share class and an “institutional” share class is the investor demographic – Class A share classes are largely comprised of smaller, individual investors, and institutional share classes are largely populated by bigger mutual fund players.

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"A" share classes and institutional share classes are two types of mutual funds, which are primarily set apart by the types of investors that qualify for each class. Class A is geared primarily for individual investors, and institutional share classes are geared primarily for institutional investors and high net-worth individuals.

Mutual Fund Classes

Mutual fund classes simply represent different types of shares. Classes are represented by letters, such as Class A or Class B, and names, such as institutional class. Each mutual fund class has a single investment portfolio, and each class also has the same investment goals and guidelines. Classes have their own fee structures, which also influence their performance.

"A" Share Class

The A share class is the most common class of mutual funds. This class has a front-end load, which means that investors pay fees upfront when they purchase shares in the mutual fund. These fees vary, depending on the specific type of fund and how many shares an investor purchases.

Typically, Class A investors pay fees in the range of 2 percent to 5.75 percent. So, for example, if you invest $1,000 in Class A shares, which carry a 5 percent front-end load, you’ll pay $50 in upfront fees ($1,000 x 5 percent), and your actual investment will be $950 ($1,000 - $50).

As a comparison, Class B shares have a back-end load instead of the front-end load that characterizes Class A shares. Class B fees decline the longer an investor has the mutual fund, and Class B shares may have a provision that allows investors to convert them to Class A shares after a certain period of time.

Institutional Share Class

Other alphabetical designations of mutual fund share classes fall under the institutional share class category. With designations that include I Class funds, R Class funds and Y Class funds, these institutional share classes are geared toward two types of investors: high-dollar individual investors and institutional investors.

Compared to A Class shares, institutional class shares generally don’t have upfront fees. Institutional classes are characterized by having the lowest fees of all mutual fund classes and for not having sales charges. The minimum investment required for institutional class shares typically is $200,000, although a more common investment threshold is upward of $1 million.

Types of Institutional Investors

The institutional share class covers a wide spectrum of investors, including foundations, endowments, corporate accounts, institutional insurance accounts and even 401(k) plans. Because 401(k) plan administrators pool employees’ plan contributions, 401(k) plans (and other types of retirement plans) qualify as institutional investors. Individual institutional share class investors are high net-worth, multimillion dollar investors.

Multiclass Mutual Funds

A mutual fund may offer more than one class from which to choose for your investment, but that doesn’t mean you’ll qualify for all classes. Some funds list all classes in one prospectus, and other funds list one class per prospectus. A multiclass offering presents fees and the structure of funds in a way that allows investors to find the best fit for their investment goals. A multiclass fund may include, for example, three share classes that are available to the individual investor, such as Class A, Class B and Class C, as well as a share class that’s only available to institutional investors, such as Class I.

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About the Author

Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.

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