If you're new to the world of mutual fund investing, you might be surprised to learn that every modern mutual fund can be classified according to its so-called "share class." In the United States, there are three principal types of mutual fund share classes: A, B and C shares. As you look for attractive funds, you'll need to pay close attention to these three categories. While its share class isn't necessarily an indicator of a given fund's quality, this characteristic could be a key determinant of its potential returns. If you're looking to preserve your wealth and maximize your returns, you should take a moment to develop a working knowledge of A, B, and C shares.
Class A shares have several distinct characteristics. They generally come with "front-end load fees" of up to 5 percent. These fees are calculated as a percentage of your initial investment in the fund and subtracted from your principal at the point of sale. As such, they may reduce your short-term gains by a substantial amount. However, these fees are usually offset by lower ongoing maintenance fees and discounts for high-value initial investments. If you invest more than $25,000 in a Class A fund, it's likely that your front-end load will be reduced by 25 to 50 percent.
Class B shares are notably different than Class A shares. Although they lack front-end fees, they typically require investors to pay substantial "back-end load fees" upon redemption. Like the front-end fees on Class A shares, these back-end assessments can reach 5 percent of the fund's total balance. If your investment in the fund has appreciated, these fees can quickly become expensive. However, Class B shares often convert into Class A shares after a pre-determined amount of time. As such, their back-end loads tend not to be overly painful.
Class C shares have some clear benefits. They're especially useful for individuals who wish to ride their shares for a quick profit and sell them within a year or two. Class C shares don't require investors to pay front-end loads and may charge discounted back-end loads of 1 percent or less. In fact, some Class C funds might not charge any back-end fees at all. To compensate for this deficiency, Class C shares generally feature high ongoing maintenance fees and expense ratios. Unlike Class A and B shares, Class C shares can't be converted and may be difficult to redeem.