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Understanding Mutual Fund Classes

Understanding Mutual Fund Classes

Companies that have more than one class of mutual funds differentiate them with the terms "Class A", "Class B", and "Class C" shares. Each share class has different types of fees. If you're a novice at this, be careful not to confuse mutual fund classes with common stock classes. Common stock classes generally have different voting rights, not different fees.

As a go-getter, you probably want the best class of mutual fund, right? "A" is generally better than "B" or "C" when dealing with systems built on things like reason and logic. Unfortunately for you, mutual funds aren't so simple. Put on your thinking cap; we're going in.

The Basics of A Shares

You're charged a front-end load when buying this type of share. A front-end load is an upfront sales or commission charge, which is directly deducted from your investment.

Advantages of A Shares

Lower annual fees

Also called 12b-1 fees, these are operational costs. If you're investing long-term, it's important to choose a class share with low annual fees.


Breakpoints offer a discount on the front-end loads on certain milestones. For example, $5,000 could be a breakpoint, and upon reaching that, your front-end load lessens. It's possible to get these discounts with your initial investment, as well as subsequent ones.

Disadvantages of A Shares

High upfront costs

With A shares, the more money invested, the more money you'll save on fees. Not everyone can afford the initial costs, however. As an anonymous man once said, "Being poor is expensive."

The Basics of B Shares

A B share will have a back-end load structure. This means the sales charge is taken out once the share is sold. With A shares, this fee is paid upfront. Class A shares may be preferable for large amounts, like $50,000+. Class B shares are for investors who don't have a lot of upfront cash, but wish to invest long-term.

Advantages of B Shares

No front-end costs

You won't get away scot-free, though. These shares are usually subjected to asset-based sales charges that are higher than front-end costs.

Converts to A shares

After several years (about 6 to 8) of holding B class shares, they can convert to lower-class A shares. You'll then pay the same or similar fees to A class shares, which, in case you haven't been following, is a good thing.

Disadvantages of B Shares

Penalties for early selling

B shares are often subjected to a contingent deferred sales charge when sold within six years. This charge gradually decreases as your investment nears six years old. The exact age requirement differs based on the fund company.

Potentially higher annual fees than A shares

Fund companies want to profit too, so expect high operational fees.

The Basics of C Shares

Like B shares, the full dollar amount invested in C shares is actually invested. Nothing goes toward fees. In general, class C shares are best for investors who plan to invest short-term.

Advantage of C Shares

No front-end costs

C shares aren't known for their abundance of advantages, but at least you won't have front-end costs.

Disadvantages of C Shares

Penalties for early selling

You're typically charged 1% for selling within 12 months. Yes, even an entire year is considered short-term when investing.

High asset-based charges

This is the biggest drawback to C shares. Your total cost of investing may be higher than A and B shares if you hold onto the shares for a long time.

Does not convert to A shares

Because there's no eventual conversion, your fees won't be reduced like B shares.

Conclusion: Choosing the Right Class of Shares

There are few hard rules in the world of investing. The differences between mutual fund classes will vary depending on the fund company. As a general rule of thumb, however, avoid C shares if you're investing long-term. You're most likely to struggle with the decision between A and B shares. Class A shares are generally advantageous when investing large amounts, when to invest large amounts, or when you have other investments in the same fund family.