Mutual funds are financial instruments that gather stocks, bonds and other securities together to make one large investment tool with several investors. More than 80 million Americans invest in these funds, but before you choose this type of investment, make sure you understand the different classes as well as the fees associated with each:
1. Class A Shares
Class A mutual funds are characterized by a front-end load, which means that the broker’s commission is charged before investing. For example, if you invest $10,000 with a 4 percent front-end load, you will pay $400 to the broker and invest the left over $9,600.
Although there is a front-end fee for Class A shares, investors can qualify for discounts, known as breakpoints, when purchasing a large amount of shares. Due to these discounts, Class A shares are the best choice for investors who wish to purchase a large number of shares and hold them over several years.
2. Class B Shares
Unlike Class A shares, Class B shares do not have an upfront charge for investing. Instead, investors are charged after they sell their shares. This fee is called a contingent deferred sales load (CDSL) and can also be referred to as a back-end sales load. Class B share investors are urged to keep their investments for longer periods since the CDSL fee decreases overtime. For example, if the fee starts at 4 percent, the fund may decrease the fee by 1 percent each year until there is no fee at all.
3. Class C Shares
The final class of mutual fund, Class C shares, is very similar to Class B shares. Both classes share the back-end fee which is charged at the time of sale. The difference is that the CDSL fee decreases much faster for Class C shares, usually after one year. This characteristic makes Class C shares the best choice for investors who want to buy a large number of shares for a short period of time.
You should be aware that different companies classify mutual fund classes in various ways and may not always use the “A, B and C” structure. Check whether your broker charges a front- or a back-end fee to determine your share class. Be sure to analyze your current financial situation and future goals in order to choose a mutual fund class that’s right for you.