Multiclass mutual funds offer investors options for buying shares. The share class, A, B or C, determines when the sales charge, or load, is paid -- upfront, when shares are redeemed, or through higher annual expenses. Selecting the appropriate fee structure depends on your financial situation, time horizon and investment goals. Class B shares don't have an upfront sales charges, but withdrawals during the surrender period typically trigger a fee.
Mutual Fund ABCs
Class A shares deduct an upfront sales charge from your initial investment. Purchasing B shares means your entire investment goes to work for you, but if you withdraw within a certain period, you'll be charged a "back-end load," or contingent deferred sales charge. C shares typically impose a 1 percent redemption fee for shorter periods but carry higher ongoing operating expenses. Regardless of the fee structure, the mutual fund's assets are invested in the same investment "pool," or portfolio, and the fund follows the same investment objectives and policies.
The contingent deferred sales charge is incurred when you withdraw class B shares during the surrender period, which generally lasts six to eight years. This declining sales charge starts during the first year of investment and is eliminated over time. A typical schedule is 5 percent for the first year, eventually dropping to 1 percent. Some mutual fund companies waive this charge in certain situations. Read the prospectus before investing and remember selling B shares during the surrender period can reduce your overall investment performance.
Assume you bought $10,000 in class B shares and sold them in the first year. If the fund charges a 5 percent deferred sales charge in the first year, you'd be required to pay 5 percent of either the initial investment or the current value, whichever is lower. If the sales charge declines by 1 percent a year and you held the investment six years or more, there would be no back-end load charged on redemptions of those specific shares.
While all mutual funds charge a management fee, many also charge a 12b-1 fee. This refers to the SEC rule allowing mutual funds to cover marketing and distribution expenses through an additional yearly fee. This fee is higher for class B shares. However, after the surrender charge period is over, B shares typically revert to A shares with lower operating expenses. Keep track of your investments to know when they are scheduled to convert to A shares.
Debbie Leaman lives in Salt Lake City. In 2004, she left a 20-year career in financial planning to pursue writing. Since then, she has contributed to publications as diverse as "Barrons," "Women’s Adventure," "JetWings" and "Utah Bride & Groom." Leaman is a graduate of Tufts University.