Series 7: 6.1.3.2 Mutual Fund Shares (A, B, And C Shares)

6.1.3.2  Mutual Fund Shares (A, B, and C Shares)

Investors can purchase the same mutual fund shares in several ways. Shares are categorized into classes based on how the fund recovers sales charges and other expenses. A, B, and C shares are the most common classes. Funds may have other classes of shares, which the prospectus will describe.

A shares are sold at a public offering price of NAV + front-end sales charge. The load comes off the top of the amount invested, reducing the amount of money available to buy shares. Thus, if an investor has $10,000 to invest in a mutual fund and there is a 5% front-end load, $500 will go to the broker selling the fund, and only $9,500 will be used to purchase shares. Sales charges can be reduced through breakpoints, as illustrated previously. A shares may include an annual maintenance fee (12b-1 fee, see later); this fee is usually lower for A shares than for B shares or C shares. A shares are most appropriate for accounts with a large enough investment to benefit from a breakpoint.

B shares are sold at the NAV with no up-front sales charge. Thus, the full amount of the investor’s money is available to buy shares. Instead of charging a front-end load as A shares do, B shares charge a back-end load (called a contingent deferred sales charge) upon selling, as well as a higher 12b-1 fee. After a certain number of years of holding the fund, the back-end load goes away and the B shares essentially convert to A shares. The back-end charge is assessed on the appreciated value of the shares, so it could be substantial. Annual maintenance (12b-1) fees are higher for B shares than for A shares. B shares are more appropriate for accounts not large enough to reach breakpoints and for investors who intend to hold the shares for a long p