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These are the different types of mutual fund classes.

Mutual funds can simplify the diversification of your portfolio. Mutual fund share classes will determine just how much that diversification will cost. While mutual funds will let you invest in a collection of stocks and bonds through index funds or exchange-traded funds (ETF), mutual fund share classes may determine which fit your budget best.

Mutual Fund Share Classes Defined

Mutual fund share classes do not affects the investments a mutual fund holds or fund’s objectives. They simply indicate the different fees and costs associated with each class. Those charges can have a direct effect on an investor’s returns.

Why have different mutual fund share classes? It all depends on when investors want to pay their fees. If they want to pay them up front and hang on to shares long-term, that’s an option. If they want to hold shares for maybe 5 years and pay a back-end fee that decreases each year, that’s another option. If you want to keep shares short-term and pay a percentage fee for a year or so, you can. The best option may be whichever is most cost-efficient for you.

Types of Mutual Fund Share Classes

These are the different types of mutual fund classes.

There are four main types of mutual fund classes:

Class A Shares

These shares typically require investors to pay a front-end fee at the time you purchase your shares. This fee often ranges from 3% to 5%, although it can be higher, depending on the fund.

Class A shares may also require other fees. The 12b-1 fee. for example, is built into the fund’s expense ratio. That ratio is the percentage of assets that make up the total cost of owning the fund. Class A tend to have a lower 12b-1 fee than other fund classes.

Class B Shares

Unlike Class A shares, Class B shares charge a load or sales fee at the back end, when shares are sold. The longer you hold your shares, the lower this fee is. After a certain period, that fee can drop to zero. As with Class A shares, you’ll also be charged a 12b-1 fee to own Class B shares. That fee, however, will be higher than that of Class B shares.

These shares also charge an expense ratio higher than Class B shares, but they convert to Class A shares after a certain time. That makes Class B shares less expensive to hold in a portfolio for the long term, but lower-fee ETFs are starting to put pressure on this class of shares.

Class C Shares

Class C shares have neither an upfront fee nor a back end fee. Instead, they charge a level annual fee around around 1%.

Combined with the 12b-1 fee and the expense ratio, that level fee makes Class C shares a potentially costly long-term investment. They also don’t convert to less-expensive shares.

Class D Shares

Class D mutual funds, or “no-load funds,” have no fee to buy them and no fee to sell them. There isn’t a level percentage fee either.

You pay only the 12b-1 fee and the annual expense ratio. That makes Class D shares far more affordable than the aforementioned classes for both for short- and long-term investment.

What About Other No-Load Fund Shares?

There are other ways to avoid load fees, but investors may need help finding them.

Mutual funds with Class Adv shares are only accessible through investment advisors. There’s no up-front or back-end load fee, and you don’t have to pay an annual level fee. However, the 12b-1 fees can be up to 0.50%.

Your 401(k) may come with no-load mutual fund shares known as Class R shares. They don’t have load fees, but their 12b-1 fees range from 0.25% to 0.5%.

What About Class I Shares?

Inst funds, also known as Class I shares, are reserved for institutional investors. That group will invest a minimum of $25,000 in those shares, and will typically do so in groups. Everyday investors may be able to access Class I shares through their employer’s retirement plan. They’ll be rewarded with lower expense ratios, which lead to lower fees than other mutual fund class shares.

Which Mutual Fund Share Class Is Best?

The answer to this is different for every investor and it depends largely on your objectives.

For example, you may veer toward Class A shares if you’re comfortable with the higher initial fee because you plan to hold your shares for several years or several decades. On the other hand, Class B shares may be more suited to someone who has a smaller amount to invest because they don’t carry the high investment minimum often required by Class A shares.

Class C shares could appeal to investors who want to make short-term trades in their portfolio to try and generate higher returns. Class D shares, though less common, could be a way to escape load fees altogether.

The Bottom Line

These are the different types of mutual fund classes.

Understanding mutual fund share classes is an important part of any investing strategy, and especially so for beginner investors. Looking at the big picture before buying shares can help you minimize the fees you pay. Minimizing fees can help you keep more of your returns over time.

Tips for Choosing Mutual Funds

  • If you need clarity on fund fees or what a fund invests in, you may want to talk to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • If you’re new to investing, chances are you’re looking forward to the returns. But Uncle Sam is never far from the exchange of money, and investing is no exception. SmartAsset’s capital gains tax calculator can help you figure out what to expect.

Photo credit: ©iStock.com/bymuratdeniz, ©iStock.com/Cecilie_Arcurs, ©iStock.com/photobyphotoboy

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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