I am a long-term investor and am looking at mutual funds, but I'm not sure if I should purchase class A or B shares, or another share class. How do these share classes work, and which is best for a long-term investor?
There are several variations on share classes for load funds, but the most common are A shares (front-end loads), B shares (deferred loads) and C shares (level loads). To figure out which share class is best for you, you'll need to look at the fund's overall expenses and consider how long you expect to hold the fund.
A shares. With these front-end loads, the sales charge is subtracted from your original investment. If you invest $10,000 and have a front-end load of 4%, for example, $400 will immediately go towards the sales charges, and $9,600 will be invested in the fund. These loads typically range from 3% to 5.75%; the fund company may lower the rate for bigger investments.
Front-end loads might work out well if you plan to hold the fund for a long time -- you get the charges over with before the fund's value appreciates.
B shares. These funds usually have deferred loads, which means you pay a sales charge when you sell the fund. The deferred load usually decreases each year -- beginning at 5% if you cash out in year one, for example, then dropping by 1% per year and disappearing after five years.
On first glance, it looks like B shares would be best if you hold the fund for a long time, because you can avoid the deferred load entirely. But these funds typically charge a high 12b-1 fee, an annual charge that covers marketing and distribution costs. This fee can be as high as 1% per year, and because it is based on the value of your account, you'll end up paying more each year as your investment grows (a no-load fund, by the way, can only charge a 12b-1 fee of up to .25% per year).
Some B-share funds switch to A shares after a certain number of years, which may decrease the 12b-1 fees.
C shares. These funds may have little or no front-end or deferred load, but often charge a higher annual fee -- which increases as the value of the fund grows.
The fund's prospectus details how the fees are levied. For help figuring which class will work best for you -- or whether you'll do better with a load or no-load fund -- see our calculator, Which is Better: Load or No-Load?
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