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. 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.


The ABCs of Mutual Fund 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: 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 an upfront sales fee, or front-end load, that is taken off your initial investment.


  • Lower 12b-1 Fees – Class A shares tend to have lower 12b-1 fees (marketing and distribution fees included in the fund's expense ratio), 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.
  • 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 – 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   These funds are not optimal for investors with a short time horizon. Say, for example, 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 money: (4,750 x 1.03) - 5000 = $107.50, or 2.15%.

    Class B Shares

    These shares are classified by their back-end or contingent deferred sales charge (a fee paid when you sell shares a specified period of years after the original purchase). 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, which charges an annual fee. 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 Ratios 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.

    The Disappearing Middle Class

    Although we've looked at all three classes, the middle class of mutual funds – the Class B shares – have been disappearing from the mutual fund industry. There are a number of reasons for this, but chief among them was a more regulatory focus on fees. The 12b-1 fees as a whole have been under attack, acting as a source of shareholder lawsuits against fund companies for alleged misuse. Many funds are dropping these fees and shrinking the class offerings to compete with exchange traded funds (ETFs). ETFs themselves have put pressure on Class B shares by providing a low-fee alternative for investors with limited investment capital. In short, Class B shares still exist, but they are a dying breed. 

    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 hypothetical ABC Company Bond Fund.

    ABC Company Bond Fund, A Versus C Comparison

    Class Symbol Front End Back End 12b-1 Fees Details
    A PAEMX 3.75% 1% 0.25%

    - 2017 total yearly return = 8.86%

    - expense ratio = 1.2%

    - $1,000 min investment

    C PEBCX n/a 1% 1.00%

    - 2017 total yearly return = 9.35%

    - expense ratio = 1.95%

    - $2,500 min investment

    Source: Hypothetical bond fund, based on a model from PIMCO

    In this example, you can see how these two 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 shares would work best because they 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. 

    Class C shares would work best if you are planning to invest for a limited period, optimally more than one year but less than three. 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 $375 will be deducted for front-end fees, the value of the initial investment is $9,625. After one year with a 8.86% return and 1.2% expense ratio, the investment would then be worth $10,362.00 = $9,625 x 1.0766.
    • Class C – There are no deductions for front-end loads. The value of a $10,000 investment with a 9.35% return and 1.95% expense ratio would be $10,740.00 = $10,000 x 1.0740.

    Note the difference – you've made $378 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 the point where Class A shares would provide you with a higher return.

    The Bottom Line

    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.