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.
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.