Classes of Mutual Fund Shares Explained 

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by Osaemezu Ogwu · 13 min read
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Photo: Depositphotos
Photo: Depositphotos

This guide will help you out and ensure you make the most of your investment from mutual fund shares while curbing losses to the minimal.

What’s often evident is mutual fund managers who have invested massively in a fund opting to take higher risks in a bid to get more returns. The only problem is, this investment may result in huge losses given the high-level risk that was taken. On the contrary, there is a surefire way to curb these losses and it begins with knowing the class of mutual fund shares that works best for you.

Each class gives you a good understanding of the fees that will be paid depending on the class you’ve chosen. You also get to know the benefits you stand to gain from investing a large capital for a certain period.

Definition of Mutual Fund Shares Classes

A fund often consists of shares and mutual fund shares classes represent the type and amount of fees that are to be paid for these shares. There is a wide range of classes of shares but the basic types are the A, B, and C classes, respectively known as A-shares, B-shares, and C-shares.

Accordingly, if a company offers more than one type of stock, it may designate them using these letters each with its own meaning. What’s more, the classification of these shares is often outlined in the company’s bylaws and charter.

Some Terms Associated with these classes of shares are:

Deferred Shares

This type of shares has fewer rights compared to regular shares. In this case, the dividends can be paid after payment has been made to other share classes. There are also cases where the payments for the dividend are made after a specified time or event. There may be conditions that shares are not to be sold until a certain date has arrived.

Preference Shares

There are also preference shares that give holders more priority over ordinary shareholders. Here, investors with more priority will be among the first to receive dividends. Due to the benefits of this class, its investors are mostly venture capitalists.

Management Shares

Holders of shares can have voting rights when they attend the company’s meetings. These shares ensure that directors in the company are still able to control its affairs even after shares have been issued to the public.

Class A Shares

Class A shares is a categorization of common stock and this class offers its investors more voting rights compared to Class B shares. The voting right, in this case, is given to the company’s managerial team. A real-life example is an investor in Class A share having six voting rights whereas a Class B investor may have only a single voting right.

Characteristics of Class A Shares

Some characteristics that set Class A shares aside from other classes include:

Higher Voting Power

Class A Shares are accredited to a company’s management team. These shares give each member more voting power. And unlike other mutual fund shares classes, each share a member has gives them more voting power. On the other hand, investors who own shares in Class A can vote in the annual meeting to decide the selection of the new board members. They also get to vote for or against new company policies.

Managerial Power Distribution

The management team owning more voting power means that they have more control over the company. The team often consists of a board of directors, senior executives, etc. On the other hand, if the management team does not have more control over the company’s shares, it would be possible for a rich investor from the public to buy these shares and take more or full control of the company.

Public Excluded

The public cannot be investors in Class A shares and neither can investors in these shares trade it. The inability for the public to participate or the shares to be traded between holders keeps the management team focused on achieving the company’s long term goals. They are less concerned about agency problems that would’ve arisen if these shares were tradable.

Enhanced Benefits

Holders of the Class A shares often benefit asides from having more voting right. They are the first to be paid dividends. They are are also prioritized when it’s time to pay off investors if the company is exiting.

Advantages of Class A Shares

Some advantages of Class A shares include:

Less 12b-1 fees

Mutual fund shares often have annual fees tied to marketing and distribution. This fee is called the 12b-1 fees, and in the case of Class A shares, they are lower. Consequently, a front-end load would be beneficial for an investor who intends to hold the shares for a lengthy time frame. The front-end load describes a commission a user pays when an asset has been acquired.

Breakpoints

For investments that are up to a specified amount in a series, investors can get a discount from the basic front-end load rates. For instance, a breakpoint of $25,000 would mean you can make an investment of the same amount to get the first discount. Generally, breakpoints allow investors who make larger investments to have a discount.

Right of Accumulation

Your ability to reach the first breakpoint using the second installment qualifies you to get a discount known as the front-end load. Let’s take, for instance, a breakpoint of $20,000 from the first investment of $5,000. Making a new investment of $10,000 to attain the breakpoint upon the next installment means you’ll get a discount on the front-load fee. This could potentially help you to save for the future.

Letter of Intent

Companies may give investors front-end load discounts if these investors indicate that they are willing to invest more money. Therefore, they can make their intentions known by specifying the amount to be invested in a certain breakpoint and at a given time.

Disadvantages of Class A Shares

Some disadvantages of class A shares are:

High Investment Cost

If you’re unable to meet the breakpoint before the deadline that was listed in the intent letter, you’ll still have to pay the usual front-end fees.

Long-term Investment

It could take a long time to finally see returns hence, those looking for short term investments may opt for something else.

Class B Shares

Common stock can also be categorized as Class B shares. These shares obtain their classification based on their deferred sales charge. The latter is the fee required for selling shares over a specified time after it was first purchased. Class B shares are beneficial to investors who have little capital and are looking for a long term investment.

Characteristics of Class B Shares

Some Characteristics of Class B shares are:

Lower investment capital: the Class B share often has a lesser share price as an incentive for potential investors.

Lower voting rights: unlike Class A shares, investors have fewer voting rights when it comes to making decisions pertaining to the company.

Less priority is given to investors in Class B shares compared to Class A shares. And when its time to share dividends or liquidate the company, investors in Class A shares will still be prioritized.

Despite this, it is worth noting that an investor will still get their due benefit irrespective of the share class they have invested in. On the other hand, companies have been sued in the past for recommending Class B shares to investors it was not suited. There have also been cases where millions have to be paid to investors due to this suitability issue.

Advantages of Class B Shares

Some advantages of Class B shares are:

Lack of Front-end Fees

Investors in this class are not expected to pay front-end fees. In this case, the initial investment profits from capital gains. The same can be said about interest income. It could, therefore, be beneficial for investors that are trying to save for retirement.

Deferred Sales Charges

Investors get a deferred sales charge that is considerably lower if they hold their shares for a long time. This would be more beneficial for long term investors.

Conversion

It is possible to covert Class B shares to the Class A shares. All that is required is to hold the shares for a specified period. What’s more, it is useful to convert to Class A since it comes with a promise of a less yearly expense ratio than that offered Class B.

Disadvantages of Class B Shares

Some disadvantages of Class B Shares include:

Long Term Investment

Deferred sales charges may still be charged if an investor takes out their fund in less than the period stipulated. As such, the investment must be made for a period of about five years in order not to attract an exit fee.

Lack of Breakpoints

There are no breakpoints in this Class of shares which would’ve impacted the deferred sales charge. And there are still no discount even if you invest a higher amount. Therefore, it can deter rich investors who may be looking for an incentive.

High Expense Ratio

Compared to other basic classes of shares, this class has the highest expense ratio. These ratios remain until investors meet the criteria to convert their investment to Class A shares.

Class C Shares

Class C shares are a class of mutual funds and they feature a level load. This level load may include certain charges for marketing, servicing, etc. These charges are imposed yearly. To that effect, investors have to cover these fees on a yearly basis.

The level load in this class differs from front-end load and back-end load respectively. While the former involves charges imposed upon the purchase of shares, the latter centers on charges set after the sale of these shares.

What’s more, a yearly fee may add more cost in the long run, which is why this class of stock is suited for people who want to hold their shares for a short period.

Advantages of Class C Shares

Some Advantages of Class C shares are:

Free of front-end fees: when it comes to Class C shares, front-end fees are not charged and as such, the entire capital that is invested yields an income.

Lack of back-end load: it is possible not to pay the back-end load. This is because it is lifted after an investor holds their shares for over a year. If the back-end load to be paid, it can be set at 1%.

Disadvantages of Class C Shares

Some disadvantages of Class C shares are:

Back-end load charged: the Back-end load charged in this class is low, however, the charge is still made if the shares are sold within the first year.

No conversion: while investors may benefit from their Class B shares being changed to a Class A, the same cannot be said for a Class C. Consequently, the lower expense ratios that would’ve been gained is lost. What’s more, the fees may increase with time and that means lower returns as an investor holds the shares for a longer time.

No discounts: investors in the Class C shares are not given a discount on expenses as the account increments to a certain level.

High expense ratios: this class has an expense ratio that is higher than the Class A but lower than Class B. These ratios are the total yearly cost of managing the fund.

Class A and Class B Shares are higher than Class C and have a lot of similarities, hence, it is needful to compare them side by side.

Similarities Between Class A Shares and Class B Shares

Irrespective of the class of common stock, they have the same equity in the company. This ensures that shareholders in each of these classes can partake in the company’s profits. On the other hand, there are investors that may be less concerned about their voting power.

They may leave the work for those with more voting power with the mindset that they are making the right decisions that would bring profit. Alternatively, these investors may be concerned when they realize that the company is not going according to plan. Despite this, their voting rights may not be enough to impact changes.

Differences Between Class A Shares and Class B Shares

Some differences between Class A Shares and Class B Shares are:

Voting Rights

The voting rights owned by each investor in a Class A shares is usually higher than that of the Class B Shares. Accordingly, a Class A share could have 10 voting rights for each stock offered. In contrast, Class B shares may only have 1 voting right for each share. Nonetheless, how much voting right is offered is determined by the company.

Occurrence

Class A shares are more common than Class B shares. It can be said that most of the shares issued are often Class A shares.

Priority

In Class A Shares, common stock investors are given less priority when it comes to payment if in any case, the company wants to sell due to bankruptcy.

Real-Life Example of Class A Shares and Class B Shares

Berkshire Hathaway offered its Class A stock at about $315,000, while its Class B stock was set at $208. For this reason, fewer investors had more voting power. However, a Class B share was created to also bring small investors into the company. Even at that, investors in Class A share had a significantly higher voting right.

How to Choose the Right Mutual Fund Shares Class for You

There are several ways to ascertain the right share class for you and the most important is by considering the investment amount and time horizon. Choosing the right class of share begins with determining how much you’re willing to invest and how long you can wait for your funds to mature.

The Class A share is suited for investors with high capital and who can afford to wait for a long time. They can benefit from discounts off the front-end load for investing more and leaving it for a longer time.

Investors who would like to opt for the Class B shares only need a small amount to invest but will still need to have a long horizon before a withdrawal is made. Investors can also defer the sales charges and the delay can be until their shares are sold. An investor also benefits from converting to Class A shares if they hold their shares longer.

Finally, investors that are looking for a short term investment can opt for the Class C share. They will not have to pay front-end fees, however, they will have to pay a back end fee if withdrawal is made in the first year after the investment. There is also the high fees that will be paid for management. They’ll also have to keep in mind that this Class cannot be converted to the Class A Shares.

Conclusion

The classes of mutual fund shares are best suited for the individual either looking for short term or long term investments. Each class has its advantages and disadvantages, which makes it needful for investors to get a good understanding before venturing in.

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