Know your mutual fund share classes

By Hayes Parnell III

When investing in a mutual fund, you can choose among several share classes, most commonly Class A, Class B, and Class C. The only differences among these share classes typically revolve around how much you will be charged for buying the fund, when you will pay any sales charges that apply, and the amount you will pay in annual fees and expenses.

These costs that are associated with mutual funds are usually deducted from the money you've invested and can affect the return of your investment over time.

Generally, mutual fund costs consist of sales charges and annual expenses. The sales charge, also called a load, is the broker's commission deducted from your investment when you buy the fund or when you sell it. The annual expenses cover the fund's operating costs and 12b-1 fees which include management fees, distribution and service fees, and general administrative expenses. The expenses are generally computed as a percentage of your assets and then deducted from the fund before the fund's returns are calculated.

So which share class should you choose? The answer to that depends on two factors: how much you want to invest and how long you want to keep the investment.

Class A shares may appeal to you if you're considering a long-term investment in a large number of shares. When you purchase Class A shares, a sales charge, called a front-end load, is typically deducted upfront, thus reducing the actual amount of your initial investment. For example, suppose you decide to spend $35,000 on Class A shares with a hypothetical front-end sales load of five percent. You will be charged $1,750 on your purchase, and the remaining $33,250 will be invested. However, Class A shares offer you breakpoints. These are discounts on the front-end load if you buy shares in excess of a certain dollar amount. Typically, a fund will offer several breakpoints; the more you invest, the greater the reduction in the sales load. Since rules vary, read your fund's prospectus to find out how you may qualify for available breakpoint discounts.

Class B shares may appeal to you if you wish to invest a smaller amount of money for a long period of time. Unlike Class A shares, there is no up-front sales charge, so all of your initial investment is put to work immediately. Instead, Class B shares have a back-end load, often called a contingent deferred sales charge (CDSC), that you pay when you sell your shares. The load usually decreases over time. By the end of the time period no sales charge applies. At that stage your shares may convert to Class A shares.

When you purchase Class C shares, a front-end load is normally not imposed, and the CDSC is generally lower than for Class B shares. This charge is reduced to zero if you hold the shares beyond the CDSC period, which for Class C shares is typically 12 months. For those reasons Class C shares may be appropriate if you have a large amount to invest and you intend to keep the fund for less than 5 years.

Consult your friendly home town banker for all of your mutual fund investment planning needs.







– Hayes Parnell III is the chairman and founder of Covenant Bank.

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