Opening the conversation on mutual fund share classes

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In some circles people refer to mutual fund share classes as alphabet soup. Why?

Because some fund families have lots of share classes beginning with A, B, C, some even have D, I, M, Y etc. It can look alot like the letters floating in a nice big bowl of hearty Campbell’s soup.

On a more serious note, people often ask me to explain to them why mutual funds have different share classes?

Here’s my answer:

• by having different share classes it gives the mutual fund industry different ways to market the fund to the public
• it offers fund investors the opportunity to select a share class they feel most comfortable with
• it gives financial advisors different ways to overcome the issue of client cost.

Almost all mutual funds, recommended by financial advisors, are load funds and can be broken down into 3 classes: Class A shares, Class B shares and Class C shares.

Some fund families may not offer all three classes and some fund families have additional share classes (usually reserved for institutional investors) where the minimum initial deposit required is significantly higher. For the purposes of this post we’ll focus on A, B and C classes.

The 3 major differences between the share classes are:

1. How investors are charged to buy into the fund- there is an upfront sales charge for purchasing an A share, which decreases the amount of your initial investment by the (percentage) amount you are charged. There is no upfront sales charge for purchasing a B or C share, you start with the full amount you planned to invest.
2. The underlying fees and expenses each share class carries- the underlying operating expenses are lower for an A share, in part, to make up for the upfront sales charge we discussed in the previous paragraph. Class B and C shares have higher operating expenses, which are usually equal, in part, to make up for the client not being charged an upfront load.
3. Whether or not there is a CDSC (Contingent Deferred Sales Charge) for selling out of a fund and for how many years is the penalty window open- there is no deferred sales charge for selling an A share, you can sell it whenever you like. There is a penalty for selling out of a B share too early; there’s no penalty for selling a C share if you hold it for at least a year.

Now, I strive to deliver, in all my posts, my personal experiences with regard to the topic; my likes and dislikes and point of view on the subject. In keeping with that theme, I’ve decided to break down each share class into an individual post, starting with the A share.

Also, I’m discovering the effectiveness of using lists, as I see them everywhere these days. I think this will be a good way for me to frame my thoughts on the different share classes.

My next post: 10 things you need to know about Class A share mutual funds…

Tags: Mutual Fund Share Classes, No Load Mutual Fund, Psychology Behind Financial Planning