A Guide to Mutual Fund Classes

A mutual fund class is the division of investors in a mutual fund pool. All investors in the mutual fund will be part of the same pool, meaning they will own shares of the same portfolio. However, members of different classes within the fund will have unique fee and expense structures, meaning their performance will differ from each other's over time. The classes of a mutual fund are regulated by the Investment Company Act of 1940; thus, they will be fairly consistent across the board.

Class A Shares

Class A is typically the standard class of a mutual fund. Class A shares typically have a front-end fee only. Investors pay this fee when they buy into the fund, and it is the only fee they pay toward the management of their share over time. The shares are not converted into another class at any point in the future.

Class B Shares

Class B shares typically can be purchased without a front-end fee, called a front-end sales load. Instead, these shares typically have a contingent deferred sales load. This means the investor pays the sales fee when the fund shares are redeemed. Class B shares, when held long enough, may have no further contingent deferred sales load obligation. This class is designed for investors looking to hold on to the shares for a long time, and investors in this class may even be offered a conversion, over time, to a 12b-1 fee, which is just an annual fee for services. The 12b-1 fee can be lowered the longer an investor holds on to the shares.

Class C Shares

Class C shares typically open with a 12b-1 fee and a contingent deferred sales load or front-end sales load. The contingent deferred sales load or front-end load, however, would be lower than the other classes' comparable fee. The shares will not convert to another class over time.

Class I Shares

The "I" in "Class I" refers to institutional investors. This means an investor in this class meets a minimum capitalization requirement, often $100M or more, in order to receive a wholly different schedule of fees and expenses. Institutional investors may be large investment pools themselves or simply investors with a large personal capitalization who are assumed to be more sophisticated than novice investors.

Selecting the Right Class

A mutual fund's prospectus may show the earnings and fee schedules for all classes at once. Or a mutual fund may issue a separate prospectus for each of the many share classes it offers. In either case, you can compare the many options to determine which option is affordable to you. Investors with a low capitalization may consider Class B shares, which require no fees up front to invest, and pay the fess for buying into the fund only later, once profits are redeemed. During the course of ownership of shares in the mutual fund, members of Class B should consider whether it makes sense to convert to another class, sell the shares, or hold on for long-term benefits. Investors with the cash and confidence to do so can purchase Class A shares, paying only once for the management fees.

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