In mutual fund investing, the old adage that high costs indicate quality couldn't be further from the truth. There is no proof that if you pay a higher fee you'll get a higher return. If anything, the mutual fund manager of a high-cost fund might take more risks in the attempt to produce a higher return - and, of course, this higher return is not a sure thing. So, if the manager's risky moves don't pan out, you've not only forked out more money in costs, but you've also seen your portfolio value shrink from capital losses.

To avoid paying high fees only to suffer losses, and to maximize your investment return, it is important to consider which class of mutual fund shares is suitable for you and to know what kind of fees you will be paying when you invest in a mutual fund. Here we give an overview of these different classes.

What Are Mutual Fund Classes?
While stock classes indicate the number of voting rights per share, mutual fund classes indicate the type and number of fees charged for the shares in a fund.

Although mutual fund companies can have as many as seven or more classes of shares for a particular fund, there are three main types of mutual fund classes that are most popular: A, B and C (also known as A-shares, B-shares and C-shares). Each of these classes has various benefits and consequences. Let's examine each in turn.

Class-A Shares
Class-A shares charge a front-end load that is taken off your initial investment.


  • Lower 12b-1 fees - Class A shares tend to have lower 12b-1 fees, so if you plan on holding these shares for several years, a front-end load might be beneficial in the long run.
  • Breakpoints - These provide a discount off regular front-end load rates each time your investment reaches a certain amount in a series. If the first breakpoint is $25,000, you could invest that amount initially to receive the first discount. (To learn more, read Break Free Of Fees With Mutual Fund Breakpoints.)
  • Right of Accumulation - This gives you the opportunity to receive a discount on the front-end load if you reach the first breakpoint with the second installment. So, again, say that the first breakpoint is $25,000 and your initial investment is $10,000. If you invest $15,000 to reach the breakpoint on the second installment, you'd receive a discounted front-load fee.
  • Letter of Intent - Some companies also offer front-end load discounts up front to individuals who initially express their intent to invest an amount over a certain breakpoint by a certain point in time.


  • High Initial Investment Required - Investors who do not have the funds to reach a breakpoint before the deadline indicated by a letter of intent will have to pay regular front-end fees.
  • Long Time Horizon Required - These funds are not optimal for investors with a short time horizon. For example, say your initial investment is $4,750 after $250 in front-load fees, and your investment increases 3% during the course of a year. If you liquidate at the end of the year, you would have actually lost $107.50 [(4750*1.03)-5000], or 2.15%.

Class B Shares
These shares are classified by their back-end or contingent deferred sales charge. These shares are typically good for investors with little investment cash and a long investment horizon.


  • No Front-End Fees - Your entire initial investment contribution earns interest income.
  • Deferred Sales Charges - The longer you hold the shares, the lower your deferred sales charge.
  • Conversion to Class A - Class B shares automatically convert to Class A shares after a certain period of time. This is beneficial because Class A shares have a lower yearly expense ratio than Class B shares (see below).


  • Long Time Horizon Required - If you withdraw funds within a certain period of time (typically five to eight years) you are a charged a back-end or deferred sales charge.
  • No Breakpoints - Class B shares do not provide breakpoints on the deferred sales charge, so regardless of how much you invest, there is no discount on these charges.
  • Higher Expense Ratios - Class B shares charge higher expense ratios than both Class A and C shares, until shares are eligible to be converted to Class A.

Class C Shares
Class C shares are a type of level-load fund. This class works well for individuals who will be redeeming shares in the short term.


  • No Front-End Fees - Your entire initial investment contribution earns interest income.
  • Small Back-End Load - The back-end load is typically only 1%.
  • Opportunity to Avoid back-End Load - The back-end load is normally removed after the shares have been held for one year.


  • Back-End Load - A back-end load - although small - is typically charged if funds are withdrawn within the first year.
  • Higher Expense Raios - Although the expense ratios of Class C shares are lower than those of Class B shares, they are higher than those for Class A shares.
  • No Conversion - Unlike Class B shares, Class C shares cannot be converted into Class A shares, removing the opportunity for lower expense ratios. As such, if you have a long time horizon, Class C shares are not optimal for you as the high management fees are continuous. That is, your investment returns will be reduced the longer you stay invested because the fees will add up considerably over time.
  • No Discounts - Class C shares do not offer discounts on expenses when the account reaches certain levels.

Applying the Pros and Cons
Let's look at how the characteristics and pros and cons described above work in the following share classes of the Index Plus Mid-Cap mutual fund shares offered by ING.

ING Index Plus Mid-Cap Funds, A,B,C Comparison
Class Symbol Front End Back End 12b-1 Fees Details
A AIMAX 3% n/a 0.25%
  • 2004 total yearly return = 16.09%
  • expense ratio = 1%
  • $1,000 min investment
B APMBX n/a 5% (6-yr declining balance) 1% (converted to Class A after 8 eight yrs)
  • 2004 total yearly return = 15.23%
  • expense ratio = 1.75%
  • $1,000 min investment
C APMCX n/a 1% (expires after one year) 0.75%
  • 2004 total yearly return = 15.5%
  • expense ratio = 1.5%
  • $1,000 min investment
Source:, June 30, 2005, and ING Funds, July 22, 2005

In this example, you can see how each of these different share classes are better for different types of investors and situations. If you plan on investing in this fund for retirement and your retirement is 20 years away, Class A or B shares would work best because they both offer declining costs the longer you stay invested. Also, if you plan to invest just one lump-sum amount and it is enough to qualify for a breakpoint discount, Class A would be the best over time: you would get a discount on the initial load, and your yearly expenses (the expense ratio and 12b-1 fees) are very low, allowing your investment to grow. With Class B shares, you are not charged an initial fee; however, you are charged a 1.75% expense ratio per year rather than 1%, and you would need to keep invested for at least eight years before the Class B shares convert to Class A. At the same time, if you are planning to invest in the fund continuously, Class B may be better as each deposit is not charged.

Class C shares would work best if you are planning to invest for a limited period, optimally no less than one year. In this way, you avoid both front- and back-end loads. Although your expense ratio will normally be higher than Class A shares, your full investment will gain interest while it is invested.

To show you how Class C shares work best for a shorter-term investment, let's compare the returns of a one-year investment of $10,000 in Class A and the same kind of investment in Class C shares:

  • Class A - Because $300 will be deducted for front-end fees, the value of the initial investment is $9,700. After one year with a 10% return and 0.25% 12b-1 fees, the investment would then be worth $10,645.75 ($9,700*1.0975).
  • Class C - There are no deductions for front-end loads, and the back-end load requirement expires after the year is up. The value of a $10,000 investment with a 10% return and 0.75% 12b-1 fees would be $10,925 ($10,000*1.0925).

Note the difference - you've made $279.25 more with Class C shares. Over a long period, however, Class A shares would be more optimal: the Class C's higher 12b-1 fee paid over the course of more than 10 years would eat into your returns to a point where Class A shares would provide you with a higher return.

When deciding which class of mutual fund shares to choose, remember to read the prospectus. In addition, you must take into account your investment horizon, the amount you have to invest initially, the frequency of your investments and the probability you will need to withdraw funds before you initially intend to do so. For an overview of mutual funds, see the Mutual Fund Basics Tutorial.

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Mutual Funds & ETFs

    Top 5 Bear Market Mutual Funds

    Discover five bear market mutual funds that investors can turn to for generating maximum capital appreciation during a bear market.
  4. Mutual Funds & ETFs

    4 Mutual Funds to Consider If Interest Rates Rise

    Learn what mutual funds will perform best if interest rates rise. Interest rates can rise due to inflation or to an improving economy.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Mutual Funds & ETFs

    Top 5 Chinese Mutual Funds

    Learn about some of the most popular and best performing mutual funds that offer investors exposure to the important emerging market economy of China.
  10. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  1. Supply

    A fundamental economic concept that describes the total amount ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  4. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  6. Series 6

    A securities license entitling the holder to register as a limited ...
  1. What happens when I want to sell my A-shares of a mutual fund?

    Typically, commissions or other sales charges may apply when a mutual fund is sold. This is an important factor in deciding ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  5. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  6. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!