Mutual fund investors must consider a variety of factors when choosing which fund to buy. Fund companies and fund strategies are vital, but one aspect of funds that can subtly affect profits is the fund share class. Mutual funds are divided over three types of share classes – A, B and C – each of which is structured differently where its fees are concerned. The primary difference between classes A and C is that class A funds impose fees when you invest in the fund (expressed as a percentage of the investment), while the fees for class C funds are paid to the fund through its annual fees.
Because Class C funds allow investors to dole out commission fees over time, this gives investors an initial perk of being able to invest their entire amount free of the up-front fees required from Class A funds.
Creating Definitions for Different Shares
Generally, a mutual fund's Class A shares have what is known as a front-end load. This is a sales charge taken out of your payment when you purchase the shares, reducing the number of shares in the fund that your payment buys. If a fund company's Class A shares charge an annual fee, known as a 12b-1 fee, it will likely be low.
Class C shares, on the other hand, have a small or no front-end load, and a small or no back-end load -- a sales charge taken out when you sell the shares. Instead, these Class C shares will have a higher annual sales fee taken out each year. These fees make these shares most appealing to short-term investors, as the fees will add up if the shares are held for years and years.
How Class A Works
Because a fund company takes its money up front with Class A shares, your investment needs to work hard over the long term to make up for the front load.
That means, for instance, that if you send the fund company a check for $1,000, and it has a front-end load of 5 percent, the company would take a $50 charge out, and buy you $950 worth of shares. You will need a 5-percent gain in share price just to get back to your original $1,000 investment, but every dollar you make after that is profit.
How Class C Works
Class C shares' annual fees don't hurt the initial purchase, but they cut into your profit or compound your loss.
For instance, a $1,000 investment will buy you $1,000 worth of fund shares. These shares might rise 10 percent during the year, to $1,100 at year-end. Then the company takes a 2.5-percent fee, which removes $27.50 from your value. This cuts your profit from $100 to $72.50, and you now have $1,072.50 worth of shares.
But the second year, the shares rise only 2 percent in value, to $1,093.95. Now the company takes its 2.5 percent, and reduces your holdings $27.35, to $1,066.60. You actually have lost overall value for the year.
Pay Attention or Pay the Price
Every fund company's share classes are different, and you will want to read the fine print carefully to make sure you understand a particular set of fees.
You also need to understand how the fees affect your overall investment strategy. For instance, Class A shares may be ideal for those seeking a long-term investment in a fund company with a strong track record. On the other hand, Class C shares' higher annual fees tend to punish investors who leave their money just sitting around in the fund.
Eric Strauss spent 12 years as a newspaper copy editor, eventually serving as a deputy business editor at "The Star-Ledger" in New Jersey before transitioning into academic communications. His byline has appeared in several newspapers and websites. Strauss holds a B.A. in creative writing/professional writing and recently earned an M.A. in English literature.