The Difference Between Classes A, B, and C Mutual Funds

You can choose from literally tens of thousands of mutual funds to purchase.

You can choose from literally tens of thousands of mutual funds to purchase.

Mutual funds allow investors access to diversified portfolios run by professional money managers. Some funds, known as "load" funds, require investors to pay a sales charge to purchase the fund. When buying a load fund, you can purchase either A shares, B shares or C shares, each of which has a different commission structure and annual expense level. Since you can only buy one type of share class, you'll have to choose which is most advantageous for you.

Class A Shares

If you choose to purchase Class A shares, you'll have to pay an up-front sales charge. The Financial Industry Regulatory Authority limits the size of the charge to a maximum of 8.5 percent, although most fund companies only charge about 5.75 percent for A shares. Since the sales charge is taken directly out of the money you invest, less of your money is immediately invested in an A share than a B or C share.

Class B Shares

Class B shares don't charge an up-front sales commission but rather come with a back-end sales charge known as a "contingent deferred sales charge," or CDSC. Typically, you'll have to pay a CDSC if you sell your B shares within six years of purchase. The size of the CDSC usually goes down every year that you hold the fund. For example, if you sell a B share in the first year after you purchase it, the CDSC may be 6 percent, declining to 5 percent in year two, 4 percent in year three, and so on down to zero after year six.

Class C Shares

Class C shares, sometimes referred to as "level-load" funds, don't charge an up-front fee or a CDSC. Rather, C shares typically have a redemption fee of 1 percent or perhaps 2 percent if you sell them within the first year after purchase. After that brief holding period, it won't cost you any commission to sell your C shares. Annual expenses of C shares are typically higher than both A shares and B shares to help compensate for the lack of a true sales charge.

Choosing a Share Class

The best share class for you might depend on your investment horizon. If you are going to hold a mutual fund for a few years or less, C shares might be your most inexpensive option. Although the annual expenses are higher, you can avoid paying both a front-end and a deferred sales charge. Class A shares are typically your best bet with large purchases, as sales discounts known as breakpoints kick in with larger purchases. You can often purchase A shares with no sales charge at all if you invest $1 million or more. B shares tend to be the most expensive share class overall, since they have higher annual expenses than A shares and higher back-end charges than C shares.

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About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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