Fund Share Classes – From A to Z
When looking to either initially build out a portfolio or add to an existing one, investors need to spend a significant amount of time researching different fund families and often multiple funds within a family with varying objectives. However, the “fun” does not end there. After an individual has selected the applicable fund that meets his or her needs and has the best prospects for appreciation, a decision must be made on which share class to purchase. Luckily, the entire alphabet is not covered but there are multiple classes with important distinctions that must be properly considered.
What follows below are definitions and guidelines for the varying share classes available that an investor should be mindful of when reading the fund’s prospectus, or speaking with a broker or advisor.
A SHARES - This class will usually have a front-end load—a charge where the purchaser pays a pre-designated percentage of the initial investment (5% for example). In addition, there are generally breakpoints where the investors receives a discount. For example, a purchase of $25,000 into a fund provides a discount on the load while a purchase of $50,000 provides an even bigger discount. A lesser charge may also apply if the purchaser already owns holdings in the family offering the fund. Class A shares also tend to have lower 12b-1 fees (an annual marketing or distribution fee).
Thus, this class may make sense for investors with a long-term time horizon and who have enough money to invest to reach the breakpoints.
B SHARES - This class does not generally charge a front-end load. It will, however, charge a contingent deferred sales charge (CDSC). This fee is imposed upon the investor when his/her shares are sold. There is generally a schedule where the longer the shares are held, the lesser the CDSC, with it eventually going to zero. Also, Class B shares often have a provision where they convert to Class A shares after the CDSC has expired. This can be beneficial to the investor since Class B shares have higher 12b-1 expenses on an annual basis than the Class A shares.
Hence, B shares are more advantageous for those with limited funds to invest but with a long-term expectation of holding the shares.
C SHARES – This class primarily functions as a level-load fund. There is generally a back-end load charge if shares are sold within one year. The load is generally about 1%.
This class may make sense with investors with a short-term time horizon of at least one year. The possibility will exist for the annual expenses to run even higher than Class A shares and possibly Class B shares if shares are held for a multi-year timeframe. Class C shares also do not have any conversion features.
R SHARES - This class is designated for retirement accounts. These funds usually do not carry any front-end or back-end charges. However, operating expenses may vary greatly from one fund family to another. They generally may only be purchased through 401(k) and other employer sponsored plans.
I SHARES - This class is used by fund families to offer an investment vehicle for institutions. This is due to the fact that there is generally a minimum investment of $1 million, or more. These funds will usually have no load, and a low cost structure.
Z SHARES - This class is available to employees of the fund family that offers and manages the fund. Shares of the Z class may be offered to employees for purchase or as part of their compensation.
D SHARES - This class is a no-load fund which are generally available through discount brokers’ “fund supermarkets.” While there is no upfront fee, there are usually commissions on the transaction as well as annual 12b-1 fees, which the fund pays to the broker. These types of funds will at times be designated as share class “F.”
ADVISOR CLASS – This type is designated for funds that are available only through an investment advisor. There will generally not be an upfront load charge. However, there may be 12b-1 fees, which that lessen the total return.
NO-LOAD/INVESTOR CLASS – These are funds which do not charge a front-end or back-end load. This is made possible as this class of fund is sold without the assistance and/or expertise of a financial intermediary. These funds are sometimes designated as “Investor” shares or they simply do not have any type of class attached to them. These funds are an excellent choice due to their low costs, and especially for veteran fund investors who follow their fund holdings and the industry on a regular basis.
SUB CLASSES – At times, funds will form sub-classes of a particular share class. This is done for the most part with Retirement (R Class) shares. For example, a fund might have five different fund classes to offer, which could be designated as R1, R2, R3, R4 and R5. Investors need to distinguish between each of these classes as there may be significant differences between the fees and expenses of each.
In conclusion, there are potentially numerous share classes to choose from for a specific fund within a family. Terms and conditions, as well as expenses may vary greatly from share class to share class. It is, therefore, very important for an investor to read the fund’s prospectus to understand not only how one’s money is being invested by the fund but to also comprehend which share class is the best fit based on factors, such as how much you have to invest initially and the length of time the investment will be held.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.