Mutual Fund Investing and Share Classes
There are many share classes for mutual and they are standardized across all the mutual fund companies. Funds from the same mutual fund company are commonly referred to as fund families. Even though there are many share classes they fall into three basic categories.
You can think of share classes like using a car to commute to work. If you only needed the car a few days a year it would be cheaper to take a taxi or rent a car. Most people who commute every day would opt to spend the money up front to buy a car. The third option is to lease the car (in this case for seven plus years) at which point you own the car. The same basic idea holds for mutual funds.
Bottom Line Up Front
A-Share = You own (includes D-Z Shares, except R)
C-Share = You rent (includes R-Shares, most "No Load Funds")
B-Share = Lease to own
A-Shares: LONG TERM INVESTING
Good value for investments > 3 years
*Sales/Commissions (Fees) are paid up front: One time fee as much as 5.75% decreasing with cumulative quantity you have invested with the company becoming 0% at or above $1,000,000.
*For each mutual fund company you choose to use you will pay an average of $10,000 over a lifetime in sales fees to reach $1,000,000. (This does not apply to D-Z Shares)
B-Shares: DO NOT BUY
*Reduced upfront fee in exchange for an extra annual fees built in for a term of 7-10 years and a high penalty if you sell before that period.
*Example: Advisor tells you that you buy in at half the cost of A-Share now and it will convert to an A-Share in 7 years as long as you don't sell in the next seven years. They may gloss over the part where your investment is reduced by 0.5% for the next 7 years to pay the advisor (that's not just 3.5% of your investment it includes your profit compounded annually, that could be 5% in this conservative example) .
*No matter what you are told you are better off buying A-Shares.
C-Shares: SHORT/MID-TERM INVESTING
*Cost effective for < 5 years or emergency funds
*Most funds have a 1% penalty if withdrawn prior to 1 year holding period.
- Invesco C-Shares (can be purchased at most financial institutions): Have no fees or penalties for deposit and withdraw, great for short term saving or tactical investment (allow 3-5 days to convert back to cash).
- Fidelity C-Shares (Fidelity/Fidelity Advisor can be purchased at many financial institutions): 2 month holding period.
*Note: During the holding period the shares can still be exchanged at no additional cost for any other C-Share in the mutual fund company.
*An R-Share is normally a version of a C-Share made specifically for a retirement account. Sometimes the rates are reasonable and sometimes they are not.
*You can think of these just like A-Shares
*These are mostly institutional shares, admin shares, and employee shares.
*These are like A-Shares with reduced or no fees to purchase, many re not available to the public (or everyone would buy them).
No Load Funds: NO LOAD MAY NOT BE A GOOD DEAL
*No commissions/sales fees ("load" is a term used to mean commissions and sales fees: Front Load = commission on purchase; back load = deferred sales charges; level load = annual commission added on to the normal expense ratio such as with C-Shares).
*Many no load funds are simply index funds (and this may be fine).
*Some "No Load" funds have high expense ratios making them just another C-Share whether or not they call them that. Example: A "non C-Share no load fund" with an expense ratio of 1.2 would be a much more expensive long term investment than an A-Share with an expense ratio of 0.6 (even if you paid 5.75% to buy into it).
*Bottom line typically treat "No Load Funds" like C-Shares for evaluation purposes.
I hope that clears up the concept of share classes. In the future I will cover different categories and types of mutual funds. Keep an eye out for other topics such as stock investing, ETFs and UITs.