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What is dual class shares?

Updated: 9/26/2023
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Mutual Fund Share Classes – Part 1?

When you invest in mutual funds you are usually given the choice of share class. Let’s explore the differences so you understand what you’re being asked to decide. The main difference between share classes is the fee structure of each. There are generally four main share classes you’ll run into out there and they are lettered; A, B, C, & I. Class A shares are the most popular share class these days. These mutual fund shares charge an upfront fee, usually called a front-end load that is generally anywhere from 3% - 5% of the amount invested. It’s important to remember that this reduces the amount you have to actually invest in fund shares. Despite the upfront fee, class A shares are popular because they get the fee out of the way upfront, and they do not charge a fee when you redeem the shares so you don’t have to worry about it later on down the road. Also, class A shares usually offer a breakpoint discount for large orders. So if you’re investing a large amount of money, the load you pay may be reduced. Make sure to check the prospectus and ask your advisor about breakpoint discounts. Class B shares have fallen out of style due to regulatory issues with them. They hold much less of the market share for mutual fund shares than they did a decade ago. Still, it’s important to understand how they differ from Class A and C shares. Class B can be differentiated from class A shares in that they do not charge an upfront load. However, they do usually charge you a back-end load when you sell the shares. This back-end load is often referred to as a Contingent Deferred Sales Charge (or CDSC). Class B shares also are charged an ongoing 12b-1 fee. This is a percentage of assets that is paid out to the advisor from whom you made the original purchase of shares. The CDSC usually is paid annually, and can decrease to zero over time if the shares are held long enough. After a certain period of time Class B shares can convert to Class A shares, or sometimes Class C shares, but all of this depends on the mutual fund family and their prescribed rules. The details of fees, charges, and conversions must be spelled out in the prospectus, so make sure you read it carefully before making any investment decisions. I’ll discuss Class C and Class I, as well as wrap this subject up in my next post. Stay tuned.


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Mutual Fund Share Classes – Part 2?

In my last post I introduced the topic of mutual fund share classes and went over the key points and differences between Class A shares and Class B shares. I mentioned that Class B shares had fallen on hard regulatory times. Most of the investors who would have been putting their money into B shares opted either for Class A shares or Class C shares. Since we’ve already covered Class A shares let’s move right into C shares and what makes them different. Class C shares are similar to Class B shares in that they usually charge a Contingent Deferred Sales Charge, commonly abbreviated as CDSC. The CDSC on Class C shares is lower than what you’d pay if you’re selling your Class B shares. The trade off for this lower CDSC is that Class C shares typically charge a higher 12b-1 fee than other share classes. The specific details will be spelled out in the prospectus and should be read carefully prior to investing. The last of the four main share classes is the I shares. This class of shares is reserved for institutional investors, that means it is only sold to organizations and qualified individual investors. Unfortunately, the fee structure on these shares varies greatly from one fund family to the next, so I cannot succinctly spell out the differences here. It’s important to read your prospectus and be sure you understand how I shares differ from other share classes if you’re thinking of putting your money into them. As I’ve stated several times in this two-part series of posts, the prospectus is where you’ll find all the essential information regarding fees of the varying fund share classes. Sometimes the fund family will have one prospectus that covers all share classes of a specific fund. Other times they will have a separate prospectus for the different share classes. Either way, it’s important that you read and understand thoroughly the differences in share classes before you make any investment decisions. Many advisors provide a fee matrix that will break down the differences of the fund share classes in a straightforward and simple way, allowing you to actually see what your hypothetical fees would be given a set dollar amount of investment in varying share classes. If they don’t provide you one, ask them to do so. If your advisor doesn’t want to openly discuss the differences between shares classes or they don’t seem to understand the differences themselves, you should be looking for another advisor who’ll be open and honest with you about the choices you’re making with your own money.