When you purchase a
load mutual fund,
you may have to decide which
class of shares
to buy. The class you choose — A, B, or C shares — determines when you pay the sales charge and the cost of holding the fund for different lengths of time. You can find the comparative costs for each class of shares a fund offers in its
prospectus.
Choosing the best class for your situation can help minimize your costs. If you're a long-term investor, for example, paying a
front-end load
and a lower annual fee may be a better choice. These shares, generally known as Class A shares, may also entitle you to a reduced sales charge if you invest a certain amount of money in the fund. The qualifying investment levels are known as
breakpoints,
and will be specified in the prospectus if the fund offers them.
Mutual fund ABCs
With Class B shares, you don't pay a sales charge up front, but you do pay a percentage of the amount you invested if you sell within the first seven years in most cases. This is called a
back-end load
or contingent deferred sales charge. The annual operating expenses of Class B shares are higher than Class A shares during the period when the back-end load applies. After that period ends, Class B shares convert to Class A shares, and you don't pay a sales charge when you sell.
Whether or not Class B shares are more cost effective than Class A shares depends on the rate that applies to the back-end load and the difference between the operating expenses.
Class C shares are called
level-load
shares. You don't owe a sales charge when you buy, and you'll usually owe a contingent deferred sales charge only if you sell the fund within the first year of purchase. You pay an annual percentage of the value of your fund account in each year you own the fund, typically at a rate similar to the expenses on Class B shares.
Marc Lackritz
