What is a Mutual Fund Share Class and Why it Matters

By: Loni Morrow, Tony Schutte, and Trent Pepper

Mutual funds are a type of investment that allows investors to pool their money with other investors in order to buy stocks, bonds, and other investments.  Mutual funds are run by professional money managers, and there are many different types of mutual funds that have different features and risk levels.

Within each mutual fund, there are oftentimes different share classes to choose from, including Class A, B, C, I, and R.  The share class determines how and when various fees are charged for investing in the fund and what services are provided to shareholders. Each share class has advantages and disadvantages, and determining which share class will be the best for you depends on your unique situation.

The primary differences between the various share classes are the types of fees charged and the timing of those charges.  For example, Class A shares typically charge a fee when you initially purchase the shares (called a front-end load), but volume-based discounts are available if you purchase enough shares in a single purchase, if you commit to purchase enough additional shares over a given time period, or if you already own enough shares. Class B shares typically charge a contingent deferred sales charge (also called CDSC or back-end load) when you sell the shares, but this fee generally declines the longer you hold onto the investment.  Class I shares are generally only available to large institutional buyers (though they may be accessible by your financial advisor) and tend to have the lowest fees among all the share classes. 

Additionally, 12b-1 fees are charged on most mutual funds. These fees are primarily used to pay for distribution and marketing (which include paying brokers who sell shares and paying for advertising) and shareholder service fees (which include paying the individuals who answer investor questions and who provide investors with information about their investments). Named after Rule 12b-1 of the Investment Company Act of 1940, 12b-1 fees were created in 1980 with the idea that better marketing would help funds grow and increase gains for investors.

Oftentimes the custodian or broker of the invested assets gets a percentage (or all) of the 12b-1 fees. However, avoiding funds with 12b-1 fees may not always be cheaper for investors. Custodians of funds that do not charge 12b-1 fees usually charge a “transaction fee” for investing in those funds.

Mutual fund share class selection is a balancing act that depends on your investment amount, the time period you expect to hold the shares, how often you expect to trade, the amount of the custodial transaction fee, and other relevant factors.

Each share class offers something different and has its own advantages and disadvantages. An EFS Advisor will be able to provide more specific details and advice that is catered to your unique circumstances, needs, and goals.

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