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What are Share Classes?

Craig EpplerJune 14, 2018

Investments

You may have read about Class A, Class B, Class C, or the numerous other classes of mutual fund shares. A mutual fund, with one portfolio and one investment adviser, usually offers more than one “class” of its shares to investors. Each share class represents a similar interest in the mutual fund’s overall portfolio. The key difference among these share classes is that the mutual fund will charge customers different fees depending on the class selected.

Why this Matters to You

As an investor, you want to maximize your return through lower fees. Here at Hoover Financial Advisors, we utilize the institutional share class, as it is the least costly way to invest and allows us to leverage the combined purchasing strength of our clients to provide the best chance at investment success.

Terminology

There are some common terms that are used to describe share classes:

  • Contingent Deferred Sales Charge – A fee that is charged when investors sell their mutual fund shares.
  • Expense Ratio – An annual expense expressed as a percentage of the fund’s net assets. This includes management fees, marketing fees, and other ongoing fees deducted from the fund’s assets.
  • Front-End Sales Charge – A fee that is charged when investors purchase mutual fund shares.
  • Asset-Based Sales Charges – Fees that investors do not pay directly, but which are taken out of a mutual fund’s assets to pay to market and distribute its shares. For example, asset-based sales charges can be used to compensate a broker for the sale of mutual fund shares,

We consider the following available share classes when monitoring your portfolio:

Institutional Shares (I Shares)

Again, this is the share class we generally use. These shares are usually the most economical way to invest in mutual funds. To qualify for institutional shares and the associated lower fees, investors must make a large investment, usually $1 million or more. Common investors in this share class include pension funds, endowments, and other institutional investors. This share class has no front-end or back-end loads.

Class A Shares (Front-End Load)

Class A shares usually charge a front-end sales charge. When investors buy Class A shares with a front-end sales charge, a portion of their dollars will not be invested. These shares may impose an asset-based sales charge (usually 0.25% per year), but it is generally lower than the charge imposed by the other classes (often 1% per year for B and C shares).

Mutual fund companies may offer discounts if the investor:

  • Makes a large purchase.
  • Already holds other mutual funds offered by the same fund family.
  • Commits to regularly purchasing the mutual fund’s shares.

Class B Shares (Back-End Load)

Also known as a contingent deferred sales charge, the back-end load assesses charges if the investor sells shares within a certain time of purchase. Typically, this is a sales charge that starts at 5% or 6% for redemptions within the first year of purchase, and typically decreases by 1% each year that the fund is held, gradually disappearing over time.

Class C Shares (Level-Load)

This asset-based fee uses the annual 12b-1 fee as a sales charge. Under FINRA guidelines, the maximum portion of the 12b-1 fee that may be devoted to distribution costs is 0.75% of assets invested. This fee is used to recover the sales commission. A 0.25% “service fee” many also be imposed to cover annual trailing commissions to the salesperson, for a total 12b-1 fee of up to 1.0%, included in the fund’s expense ratio.

In the ever-changing investment universe, there are sometimes new share classes added to fund families that offer an even lower expense ratio. The investment management team at HFA is continuously reviewing these changes and adjusting your portfolio to your greatest advantage. This includes periodic share class exchanges, which are non-taxable events that we use to get the very best returns for our clients.

If you want to learn more about this topic, please contact our office (610-651-2777). We’re happy to answer your questions or provide more detail.

Sources:

Investopedia.com
MutualFunds.com