A mutual fund essentially means a pool of money collected from investors who are issued a share or part ownership of the fund in exchange for their investment. The pool of money collected is used to purchase and sell stocks and bonds listed on a stock exchange to generate returns for the investor. Professional fund managers manage these operations.
These fund managers need to be compensated, and hence, the mutual fund issues different classes of stock for the same fund having different fee structures. An investor can find the class of their mutual fund in the statement issued by such a fund. These classes are A, B, C, and I.
The investor can select the class of mutual funds depending upon the investment term and acceptable fee structure. Before we understand what Class C shares are, we need to understand the meaning of specific terms.
Front-end load: This is an upfront sales charge that a mutual fund charges to the investors when purchasing shares of the mutual fund. For example, if the Front-end load is 3%, then $100 spent by an investor to purchase the shares of a mutual fund will result in $97 of mutual fund shares purchased.
Level-load: This is ongoing management fees that the mutual fund charges to manage such investors’ money. Typically the management fee is around 1% on the funds managed. For example, if an investor invests $100 in a mutual fund, a management fee of $1 will be deducted every year from the returns provided by such funds.
Back-end load: This is a sales charge that a mutual fund charges to the investor when he withdraws the money from the mutual fund. For example, if a Net Asset Value (NAV) of the mutual fund investment is $100 for an investor with a 3% back-end load, an investor will get $97 if he withdraws the money so invested. Some people also call it a Contingent Deferred Sales Charge (CDSC).
What are Class C shares?
Class C shares are such classes of shares of a mutual fund issued with no front-end load and 1% back-end load, which disappears after one year. i.e., an investor can withdraw the money after one year at no additional charge.
However, the catch is that the Class C shares have the highest level-load of all classes of shares. In addition to the typical 1% management fee, they have an additional 1% fee on top of that, which never decreases over the period of investment.
Tenure of investment:
The class C shares are undoubtedly suitable for short to intermediate-term investments as the back-end load disappears after one year. The high expense ratio of 2% management fees would prove to be expensive for a long-term investment.
How does class C share differ from other classes of shares?
Class A shares are ideal for investors who can commit a high amount of capital for a long-term horizon as it incentivizes investors by offering discounts on front-end load called ‘breakpoint.’ The front-end load could be up to 5% but decreases steadily as the investment increases to 0% if the investment is $1million or more. It has a standard 1% management fee, but there is no back-end load so that the investors can withdraw the investments at no additional cost.
Class B shares are ideal for investors who have little cash and are willing to commit to a long-term horizon. There is no front-end load in class B, but the management fee is higher than class A by ¾%. The Back-end load typically starts at 5% but decreases gradually to 0 over seven years. At the end of 7 years, class B shares convert to Class A shares.
Hence, with the fee structure explained above, Class C shares are ideal for investors with a short-term time horizon of one to three years. Unlike Class B shares, investors cannot convert their holdings into class A shares from class C shares.