Mutual fund share classes determine the amount of money you pay to the fund company and to the broker when you purchase. This money covers fees, marketing costs and surcharges, all of which differ depending on the share class. The most common share classes are "A," "B" and "C." There are also "D" shares as well as "T" and "Z" shares, which are similar to "C" shares. Funds must disclose their fees to potential investors. Janus, Fidelity and John Hancock use "T" shares.
Primary Classes
The main mutual fund share classes are "A," "B" and "C." Purchasing "A," you pay a front load, or commission, from 5 to 8.5 percent, along with 12-b1 marketing fees and management costs built into the expense ratio. Purchasing "B," you pay a back-end load, which varies according to how long you keep the fund. Expense ratios, including 12b-a marketing fees, are higher for "B" than "A" shares. Over time, typically six to eight years, the amount required to pay decreases. Withdraw early, you pay more. Hold longer than required and pay no commission. "C" shares are level-load — the full amount you pay is invested into shares. Through annual fees, commissions are paid. "T" shares operate like "C" shares.
"T" Shares
"T" shares are a newer form of hybrid share class that fund companies designed for short-term investors. Try to hold longer and you’ll pay high fees. "C" shares, like "B" shares, have high expense ratios due to high 12b-a marketing fees. Often there is a 1 percent back-end load if you exit within a given amount of time. "C" and "T" shares offer more flexibility than "A" and "B" shares.
Examples
Janus, John Hancock and Fidelity all offer "T" shares. "T" shares differ at each fund company, but typically investors pay an initial sales charge, which is included in the offering price. These shares are not subject to annual 12b-1 distributions or annual service fees and you pay no sales charge when you redeem "T" shares. If, however, you were to buy at least $1 million worth of "T" shares, you would not pay an upfront sales charge as you would when it is included in the offering price. You would pay a deferred sales charge of 1 percent if you redeemed any of those shares within two years of buying them, unless you bought the shares through a retirement plan.
Tax Benefit
The "T" in the "T" share stands for "tax," due to what Globe Advisor calls a perceived tax advantage. The funds have also been called internal systematic withdrawal tools. "T" shares are popular with investors because they offer level and high cash distribution on a monthly basis. Most of the monthly payout is not taxable when received and is classified as a "return of capital" for tax purposes. According to investment analyst Dan Hallett, the distributions for "T" shares are tax efficient because they include "original capital, unrealized growth, and realized taxable income, and generally, only the latter is taxed year to year."
References
Writer Bio
Julie D. Andrews is a writer and editor living in New York City. Her articles have appeared in print or on the websites of "Prevention," "Glamour," "Fitness," "Shape," "Cosmopolitan Latina," "Elle" and "New York Magazine."