Mutual funds typically use fund assets to pay annual operating expenses, including management fees, administrative fees, and distribution costs. The cost to the investor is presented in the form of a ratio of annual operating expenses to assets under management, which is known as the expense ratio. Expense ratios can vary dramatically from fund to fund and within a fund’s different share classes. In addition to operating expenses, many mutual funds charge commissions or sales charges, known as “loads,” for certain share classes. Loads can be payable upfront or they can be deferred.
Because of the different cost structures between mutual fund share classes, there is normally an optimal share class for each investor depending on his or her investment objectives and goals.
Class A Shares
Class A mutual fund shares are front loaded, but have lower expense ratios than Class B and C shares. Generally speaking, these features make Class A shares more suitable than Class B and C shares for buy-and-hold investors. Conversely, because of their cost structure, Class A shares can be misused by brokers to churn customer accounts.
Class B Shares
Class B shares are back-end loaded, meaning that there is a deferred sales charge when the investor sells his or her shares (which is lower than the front-end load on Class A shares); however, the sales charge typically sunsets after the investor has held the shares for a certain number of years. Similarly, the expense ratio for Class B shares will often decline to match the expense ratio for Class A shares after the investor has held the Class B shares for a certain number of years.
Unlike Class A shares, there are usually no breakpoint discounts available for Class B shares. Breakpoint discounts are discounts given to investors who make certain minimum threshold investments. Accordingly, it may be more beneficial to invest in Class A shares rather than Class B shares when making a large investment. Conversely, because application of the breakpoint discount would lower the broker’s commission, there may be an incentive for a broker to recommend Class B shares, instead of Class A shares, to the investor.
Class C Shares
Class C shares often have small back-end loads, but also have high expense ratios. Typically, Class A shares will be more suitable than Class C shares for long-term, buy-and-hold investors because the incrementally higher expense ratio for the Class C shares would have a larger negative impact on long-term growth than the front-end load required for the Class A shares. Conversely, Class C shares will generally be more suitable than Class A shares for an investor that intends to hold the shares for a short period of time.
If you have suffered investment losses as a result of malpractice or misconduct our experienced team of investment fraud attorneys may be able to assist you in recovering some or all of your losses. Call us toll-free at 888-607-4819 for a free consultation or email us through our “Contact” page to schedule a free consultation.