3.1.3.2 Mutual Fund Shares (A, B, and C Shares)
Investors can purchase the same mutual fund shares in several ways. Shares are categorized into classes based on how the fund recovers sales charges and other expenses. A, B, and C shares are the most common classes and are described next. Funds may have other classes of shares, which the prospectus will describe.
A shares are sold at a public offering price of NAV + front-end sales charge. The load comes off the top of the amount invested, reducing the amount of money available to buy shares. Thus, if an investor has $10,000 to invest in a mutual fund and there is a 5% front-end load, $500 will go to the broker selling the fund and only $9,500 will be used to purchase shares. Sales charges can be reduced through breakpoints, as illustrated above. A shares may include an annual maintenance fee (12b-1 fee; see below); this fee is usually lower for A shares than for B shares or C shares. A shares are most appropriate for accounts with a large enough investment to benefit from a breakpoint.
B shares are sold at the NAV with no up-front sales charge. Thus, the full amount of the investor’s money is available to buy shares. They are subject to a back-end charge when the shares are redeemed if not held for the number of years specified in the prospectus. B shares often convert to A shares if held for a time period also specified in the prospectus. The back-end charge is assessed on the appreciated value of the shares, so the reduction in price could be substantial. Annual maintenance (12b-1) fees are higher for B shares than for A shares. B shares are more appropriate for accounts not large enough to reach breakpoints and for investors who intend to hold the shares for a long period of time.
C shares have no front- or back-end sales charges, except for a 1% back-end charge if the investor sells within one year. Annual expenses are higher for C shares than for A shares and B shares. Thus, C shares are the