A Brief Overview
Mutual funds have begun to surge in popularity with a number of investors flocking to them as their go-to investments. While there do exist a number of shortfalls associated with mutual funds, investors have grasped onto the fact that they also have a number of key advantages. These range from advanced portfolio management and dividend reinvestment to being convenient investments that are fairly priced. Investors are also able to reduce the risk their portfolio is exposed to owing to the diversification that flourishes within most mutual funds.
Set against this backdrop, it is no surprise that there exist different classes of shares that operate within mutual funds. These include A Class, B Class and C class shares. This article seeks to explore the realm of possibility that exists within the B-Share class of shares.
Defining a B-Share Mutual Fund
Mutual funds can exist in several forms and dabble in a wide range of securities. Those mutual funds that charge a sales load feature B-shares that can be understood to be a class of shares. B-Shares account for a third of the most prominent class of shares that exist under mutual funds, the other two categories being A-shares and C-shares.
Each of these share classes is tethered to a certain fee structure that kicks in at the time of purchase or redemption of shares held under a given mutual fund.
Examining the Scope of Class B Mutual Fund Shares
While mutual funds have a wide range of share classes that they offer their investors, A-share, B-share and C-share classes are found to occur most frequently. Each of these classes showcases a similar interest within a given mutual fund. That being said, they incur differing fees and expenses that the investor is responsible for paying.
Investors may be expected to pay the fees and expenses associated with the mutual fund they have invested in either directly or via fund assets.
Ordinarily, redemption fees and sales charges are paid in a direct fashion by the investor.
Conversely, the operating expenses ranging from marketing to distribution are carved out via the fund assets.
While it is normal for all retail share classes to have different expense ratios, it is the general norm for B-class and C-class shares to incur 12b-1 distribution fees. These fees heighten the overall expenses associated with their respective funds.
The Fee Structure That Prevails Within B-Shares
While class B-shares do not incur front-end sales load the way A-shares do, they are still made up of a back-end sales load composition. This composition is often referred to as the contingent deferred sales charge or CDSC.
After taking into account back-end load charges, investors expose themselves to fees when they seek to make an exit from the mutual fund they have invested in. This fee is not incurred at the time of their joining the mutual fund. This means that all the money they first arrived with is invested at the time they first purchased their shares. The bigger the investment the broader the potential for return. Had a fee been charged at this time it would reduce the scope of their initial investment.
A contingent deferred sales charge is ordinarily only applicable when an investor sells their shares within a certain time frame. This time frame usually pertains to the six years that follow the shares first being purchased. The longer the time frame that an investor holds their shares, the greater the decline in the value of the contingent deferred sales charge until it is finally eliminated.
Following a certain amount of time post-elimination – ordinarily two years – Class B shares transition into Class A shares, thereby providing investors with access to comparatively lower annual expense ratios.
It is important to understand that the sales loads mentioned here differ from the operating expenses associated with managing a fund. In order to adequately acquaint oneself with a fund’s sales load structure, investors must read the fund’s prospectus.
Expenses Associated with B-Shares
Falling under the bracket of the retail share class, operating expenses associated with B-shares have 12b-1 fees levied to them. 12b-1 fees allow for distributors and intermediaries to be compensated for the marketing and sale of retail funds. Oftentimes B-shares incur comparatively higher 12b-1 fees as they don’t involve front-end loads. Moreover, they may have commission fees applicable that reduce as time passes. Owing to this fact, B-shares tend to charge some of the highest expense ratios in their entirety, 12b-1 fees are drawn from fund assets as opposed to being directly drawn.
Apart from 12b-1 fees, investors that hold retail share classes are also expected to pay for standard management along with additional operating expenses. Management in addition to other expense fees tends to be the same regardless of the share class under consideration.
Investors have the freedom to choose the shares of their choice which can belong to any share class. The primary step however is for the investor to determine whether they would like to invest in a no-load or a load fund.
Those who have ample experience investing, are fluent with the markets and don’t need financial advice can invest in no-load mutual funds without worry. They will save ample sums of money which can be directed towards investments as opposed to paying a commission.
Those who believe they could benefit from the help of a financial expert should consider load mutual funds. Should investors feel they are likely to hold their shares for a period of five years or longer, B-shares are a viable option.
Investors must always look into the expense ratios associated with B-shares and ascertain that they are reasonable prior to making investment decisions.