3.8.1.4. Types of Mutual Fund Shares
Mutual funds tend to come in two categories based on whether or not an investor must pay a sales charge. Load funds charge a sales commission; no-load funds do not. There are three types of load fund shares, which are characterized by their sales charges. Each of these types is suitable for different customers, depending on the size of their investments and how long they intend to hold the shares.
• A shares are sold at a public offering price of NAV plus 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 the following section); 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. The shares are subject to a back-end charge when they are redeemed. If B shares are held long enough (a time period specified in the prospectus), they will convert to A shares, and the back-end charge disappears. 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-end or back-end sales charges, except for a 1% back-end charge if the investor sells within one year.