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Open-end mutual funds are either load or no-load funds. That means they either have some sort of sales charge, or they don’t. However, just because you are investing in a no-load fund doesn’t mean that, there aren’t any types of expenses. Load mutual funds charged the investor a sales charge for purchasing the mutual fund. Loads may be charged either at the time of sale (front-end load) or when the mutual fund is redeemed (back-end load). There are three different types of load funds, and their share classes differentiate them: A, B, and C

A Shares

When you purchase a mutual fund’s Class A shares, you will pay an up-front sales charge. The charge may range between four to eight percent of the public offering price initially, with declining sales charges as you purchase more shares. With the initial purchase, and any subsequent purchases, the investor pays the NAV per share plus the applicable load. Thus, the entire amount of money isn’t invested because part of it goes directly to the mutual fund family as the sales charge. However, when the investor redeems his shares, he or she will receive the NAV for the shares. There won’t be any surrender charge for taking out the money because the front-end load was already applied.

Class A shares are also subject to breakpoints. Mutual funds offer investors these breakpoints to encourage a higher investment. The fund family will set the breakpoints for each fund it offers, and when investors hit a breakpoint, they are subject to a lower front-end sales charge. For example, many fund families set their first breakpoint at $50,000. Let’s say you purchase $35,000 of the XYZ Growth Fund

Class A. You then pay the highest sales load, which in this case let’s assume to be 5.75 percent. This means that of your $35,000, $2012.50 is the sales charge for purchasing the fund. However, let’s say you purchased $55,000. The associated breakpoint is at $50,000 at which point the sales charge becomes 4.75 percent. Your sales charge would be $2612.50. Without the breakpoint system, the sales load of 5.75 percent on $55,000 is $3162.50. That’s a difference of $550 because of the breakpoint system.

$35,000- 5.75% = $2012.50

$55,000- 4.75% = $2612.50

$55,000- 5.75% = $3162.50

$3162.50 – $2612.50 = $550 savings

Mutual fund families also offer rights of accumulation to those who invest in Class A shares. Rights of accumulation come into play when you have already purchased some Class A shares and want to make a subsequent purchase. Going back to our previous example, you have purchased $35,000 of XYZ Growth Fund Class A and wish to make another purchase of $35,000. Rather than be charged 5.75 percent on the second purchase of $35,000, you would be charged 5.75 percent on the first $15,000 and then 4.75 percent on the remaining $20,000. Your total sales load for the second purchase of $35,000 would be $1812.50, rather than $2012.50 (saving you $200). This occurs every time an investor makes subsequent purchases of his Class A shares.

Original sales load – $35,000- 5.75% = $2012.50

$15,000- 5.75% = $862.50

20,000- 4.75% = $950

Total sales load for second $35,000 investment = $1812.50

$2012.50 – $1812.50 = $200 savings

Mutual fund companies decrease the front-end sales load as the amount of the investment increases. The sales load is usually phased out at $1 million. Therefore, if you were to invest $1 million with the same mutual fund family in Class A shares, you would pay no frontend sales load. Some fund families do charge a contingent deferred sales charge (CDSC) of one percent for investments of $1 million or more. For example, the mutual fund company MFS charges a CDSC of one percent when the investment is redeemed within 12 months of the initial investment. After that 12-month period, though, the investment would no longer be subject to any type of back-end load.

B Shares

Class B shares do not have an up-front sales charge; rather, they have a back-end sales charge, or a surrender charge (CDSC). The surrender charges associated with Class B shares are similar to the surrender charge schedules for annuities.

When an investor purchases Class B shares of a mutual fund, he or she does so at NAV, thus ensuring that the entire amount of money is invested. However, if the shares are redeemed within the first six years, the investor will pay a surrender charge. The shares will be redeemed at NAV, but then the applicable load will be subtracted. The surrender charge schedule for Class B shares is a declining one. After nine years, Class B shares revert to Class A shares, although no front-end sales load will be assessed at that time.

While B shares don’t have any up-front sales load, they do tend to have higher 12-b-1 fees inside. These fees, named after the 1980 SEC rule that allowed them, are annual sales fees, which are taken against fund assets to compensate the fund for any sort of distribution expenses, such as broker commissions or advertising costs. The 12-b-1 fees vary in percentage among the different fund families, and usually aren’t more than .50 percent per year. However, they may be as high as 1.25 percent. Although investors are charged a surrender charge for redeeming their shares prior to holding the fund for seven years, if they exchange their shares for shares in a different fund within the same fund family, there is no surrender charge. For instance, you purchase $40,000 of Oppenheimer Global Growth and Income Fund Class B, and a few years later you decide that you want to move $20,000 from this fund to a different fund. As long as you keep that $20,000 with Oppenheimer Funds and in Class B shares, you won’t be charged any surrender charge or back-end load. However, if you wish to move that money to another fund family, you will be charged the applicable surrender charge.

C Shares

For many years, Class A shares were the only type of share class that was available. Then fund families introduced the B class and, recently, they have begun offering Class C shares. Class C shares blend the advantages of both Class A and B shares. When purchasing Class C shares, the investor’s money is 100-percent invested. There is no front-end sales load, as there is with Class A shares. Plus, as long as you don’t redeem the shares within the first year of investing the money, you may pull out all of your money without any type of surrender charge. Therefore, there is no front-end or back-end load. However, your money will be subject to a one-percent surrender charge if you redeem your mutual fund within the first year. The rules for same-fund-family exchanges apply to Class C shares, as they do with Class B shares. Class C shares do not share in the conversion privilege, as do Class B shares. They will remain Class C.

Class A versus Class B versus Class C

There is no clear-cut answer as to which share class is the best. All three have their advantages and disadvantages. For larger amounts of money, Class A shares would probably be the best due to the reduction in the sales charge and since there are no back-end fees. If your money is within an IRA, perhaps Class B shares would be the better option. But if you wanted to invest your money and thought that you may need it within a few years, Class C shares may be the way to go. The share class that you invest in is really determined by your time frame. You may find that a mixture of share classes is preferable.