Deciphering Differences in Share Classes

If you buy a mutual fund from a broker, financial planner, or banker rather than directly from the mutual fund company, you may run into a confusing variety of share classes. These different classes of shares have varying fee structures, and choosing among them can be tricky. You can avoid this complication by sticking to a no-load fund and buying direct. But if buying a load fund from a broker, planner, or banker interests you, you may need to know the differences in class shares:

• Class A shares: These usually involve paying a sales charge (load) up front. The typical front-end load is in the neighborhood of 5.75%, but it may be higher or lower.
• Class B shares: You don’t have a front-end sales charge on these shares, but you do have a 12b-1 fee, which is usually 1% a year. In addition, expect a declining back-end charge (sometimes called a redemption fee). For example, if you sell between one and two years after buying, you may be charged 4%; between years three and four, 3%, and so on. Typically, after year six, you may have no charge.
• Class C shares: These involve a so-called level load, which means they may charge a front-end charge of 1% plus a 1% annual 12b-1 fee.

Which class of shares offers the best deal? No single right answer exists. Although the high front-end load of the Class A shares sounds scary, paying the 5% once may be cheaper than paying 1% annually over (say) a 10-year investment period.
To further complicate matters, in many cases, a B share or C share automatically converts to Class A after a period of time. The quicker B shares convert to A, the better, because this conversion eliminates the annual 1% fee. Unfortunately, share classes are not regulated and may vary from one fund company to another. Sometimes, only specific groups of investors are able to invest in special share classes.
For example, a certain share class may be designed for those who participate in 401(k) retirement plans. When buying a mutual fund through a broker, financial planner, or banker, be sure to ask about share classes and make certain you know what fees you will be charged.
If you want to avoid the confusing share classes, opt for a noload fund. No-load funds have no front-end sales charges or other loads to figure out.