Class C shares are a type of mutual fund shares. Mutual fund shares are divided up into three classes: Class A shares, Class B shares, and Class C shares. Each class of mutual fund shares is distinguished by their specific load fees and structures.
The main difference between Class C shares and the other two mutual fund share classes is that Class C shares are level-load. This means the total amount of money the investor pays to the mutual fund is invested in shares. Instead of paying a percentage of the initial investment as a commission, the investor pays the mutual fund commissions via annual fees.
Classes of Mutual Fund Shares
Class A shares charge a front-end load. When someone invests in a mutual fund, a specific percentage of that initial investment is taken out as a commission for the mutual fund's managers. Compared to Class C shares, a smaller amount of money is invested in Class A shares, since a percentage of that investment is taken as commissions.
Class B shares charge a back-end load. The initial investment buys the mutual fund shares without incurring a commission. When the investor is ready to sell the shares, however, a specific predetermined percentage is deducted from the gains and paid to the fund's managers in the form of commissions. Class B shares can also be converted into class A shares if the investor would like, while Class C shares cannot be converted.
Class C shares are advantageous because they let an investor spread out his commission payments and allow the entire investment amount to be invested, which could result in higher returns.
How to Determine Which Share Class Is Right for You
One way investors can determine which share class is right for them is to first decide on their time horizon and the amount they plan to invest. They can then use this information to evaluate each share class as a potential investment option.
For example, Class A mutual fund shares are best for investors who can afford a high initial investment and have a long time horizon. This is because Class A shares provide discounts off the front-end load to those investors who can commit to investing a larger amount by a specified time. This discount level is called a breakpoint. Some mutual funds may have investors provide a letter of intent saying they intend to invest above the breakpoint.
Class B shares are best for investors with little cash to invest and have a long time horizon. If an investor purchases a mutual fund with Class B shares, they can defer their sales charges until they sell their shares. The longer an investor holds onto the shares, the smaller the sales charge will be. If an investor can hold onto their Class B shares for a specified time, the shares will automatically convert to Class A shares. This benefits the investor because Class A shares have lower annual expense ratios than Class B shares.
Class C mutual fund shares are best for investors who have a short time horizon and plan on redeeming their shares soon. While there are no front-end fees with Class C shares, a back-end load is charged if funds are withdrawn within the first year. Additionally, investors who purchase Class C shares could pay a high annual management fee. Investors cannot convert Class C shares to Class A shares, which have lower expense ratios.