Investor Bulletin: Mutual Fund Classes
Aug. 4, 2016
The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to provide investors information about mutual fund classes. This bulletin addresses some of the fees that may apply to certain common mutual fund classes, but please note that mutual funds may have other fees and expenses that you should take into account when making an investment decision. For more information on mutual fund fees and expenses, read our Investor Bulletin: Mutual Fund Fees and Expenses.
What are Mutual Fund Classes?
Some mutual funds offer investors different types of shares, known as "classes." Each class will invest in the same "pool" (or investment portfolio) of securities, but each class will have different fees and expenses and, therefore, different performance results. Mutual fund classes let investors pick a fee and expense structure that best fits their investment goals, including the time that they expect to remain invested in the fund.
This bulletin discusses some of the common types of classes that investors can purchase. Each of these classes may charge a fee when you purchase shares of the fund, or when you sell shares of the fund. These fees, known as “sales loads” or “sales charges,” are generally used to compensate the investment professional who sells you shares in the fund. Different classes may charge different sales loads due to the classes having different distribution arrangements and shareholder services.
Note: Certain mutual funds also offer funds with no sales load and no sales charge, known as “no-load funds,” for purchase directly from the mutual fund company. However, no-load funds continue to have regular fund operating costs that are not necessarily associated with the purchase or sale of fund shares, such as investment advisory fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants’ fees.
Common Mutual Fund Classes.
- Class A shares might have a front-end sales load (a type of fee that investors pay when they purchase fund shares). Class A shares might also have a 12b-1 fee (an annual fee that covers the costs of marketing and selling fund shares), although this fee would generally be lower than the 12b-1 fee for certain other classes, which may make Class A shares a good option for longer term investments.
- Class B shares might not have any front-end sales load, but might have a contingent deferred sales load (CDSL) (a type of fee that investors pay only when they redeem fund shares) and a higher 12b-1 fee. The CDSL typically decreases to zero if the investors hold their shares long enough (e.g., often six to eight years). Class B shares also might convert automatically to a class of shares with a lower 12b-1 fee if held by an investor for long enough.
- Class C shares might have a 12b-1 fee and a CDSL or front-end sales load, but the CDSL or sales load would be lower than Class B's CDSL or Class A's front-end sales load. Class C shares might not ever convert automatically to a class of shares with a lower 12b-1 fee, meaning you could end up paying more if you hold these shares for a long time.
- Class I shares might have lower overall fees than Class A, B, or C shares, but they would be sold only to institutional investors making large fund share purchases. However, these shares could be available to you through your employer (e.g., through a retirement plan). Taking advantage of Class I shares, if they’re available to you, might be a good way to reduce your overall cost of investing.
Additional types of classes may also exist for some funds and may be a better fit for your needs, so do your homework and comparison shop. Whenever a fund offers several classes, you should consider which class is best for you.
What Factors Should You Consider in Selecting a Mutual Fund Class?
If a fund offers multiple classes, it may describe them all in a single prospectus, or it may describe them in separate prospectuses. You should decide which class best fits your investment goals after careful consideration of the information disclosed in the prospectus (or prospectuses). In some cases, you may not be eligible to purchase all classes. To figure out how the costs of a mutual fund add up over time and to compare the costs of different mutual funds, you should use a mutual fund cost calculator.
Here are a few factors to consider when choosing a class:
- Your Financial Position. Consider how much you plan to invest in mutual funds and when you plan to make those investments. Mutual funds may offer you discounts on the front-end sales load if certain criteria are met, for example if you, or you and eligible family members:
- make a large purchase;
- already hold other mutual funds offered by the same fund family; or
- commit to regularly purchasing the mutual fund’s shares or purchasing a certain amount of the mutual fund’s shares in the future.
Typically as you invest more there is a greater reduction in the sales load.
- Your Time Horizon. Consider how long you expect to own the mutual fund and your need to access funds when you think of any trade-off between front-end sales loads, CDSLs, and ongoing sales charges. Smart planning may help reduce the total amount of money you pay in sales charges.
- Sales Charges. Be aware that the sales charges you pay will likely be used to compensate your financial professional, and that he or she may receive higher payments by selling certain classes. Sales charges are not the only fees and expenses you will pay to invest in a mutual fund, and you should always consider your total cost of investment. Be sure to review your account statement(s) regularly, read the mutual fund prospectus and ask your financial professional to explain any charges that may apply.
For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.
For additional information related to mutual funds, also see: