The A, B Cs of Mutual Funds

By Greer Gibson Bacon, CFP®


In 1980, there were 564 mutual funds and your choices were simple … load or no-load.  Today, there are 8,000 and your choices are more complex as most funds offer multiple share classes.  To make a good (and profitable) choice, you need to understand a fund’s cost structure.

First, there’s no free lunch on Wall Street.  All funds charge on-going fees to defray management and administrative costs, and earn a profit.  They’re easy to overlook since they’re deducted from the fund, not your account.  But, you should know a fund’s “expense ratio” before you invest because it reduces the total return to you.

Second, some funds impose a load and/or 12b1 fees.  Here’s a quick rundown on how the most common shares classes charge these commissions.

Class A shares.  You pay an up-front commission when you buy.  This is how your broker is paid.  The commission varies depending on the fund and how much you invest.  For example, it might be 5% if you invest $10,000, 3% if you invest $100,000 or 0% if you invest $1,000,000.  The thresholds at which the commission drops are called, “breakpoints”.  Some A shares charge a trailing commission (12b1 fee) of 0.25% or so, too.  If so, this is another way your broker is paid.  Unlike up-front commissions, they’re included in a fund’s expense ratio because they’re ongoing.  Always, A shares have lower expense ratios than B and C shares of the same fund.  They may be a good choice for long-term investors especially those with large amounts to invest.

Class B shares.  Although you don’t pay a commission when you buy, the fund pays your broker a commission anyway.  Usually, it’s similar to the maximum A share commission.  To recoup this expense, it increases your expense ratio by 1% or so and imposes a “contingent deferred sales charge” (CDSC) if you sell within a certain period.  For example, if you sell within two years, it might be 5%.  Then, it might drop by 1% per year until it reaches 0%.  At that time, some funds convert B shares to A shares, which reduces your expense ratio.  Since B shares don’t offer breakpoints, most funds won’t accept investments of $100,000 or more.  They may be an OK choice for long-term investors with limited amounts to invest.

Class C shares.  Although you don’t pay a commission when you buy, the fund may pay your broker a nominal commission (1% or so) anyway and impose a nominal CDSC if you sell within a short time.  That said; they charge a trailing commission of 1% or so, which is paid to your broker for as long as you own the fund.  For this reason, C shares are best-suited to investors with a short-to-intermediate time horizon.

Reputable brokers always explain how different share classes work and recommend the one that is most suitable for each client.  Also, they offer clients the current prospectus so they can verify the facts for themselves.  If you want to do more research on your own, a great website is


This article first appeared in the June 2016 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.


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