Are Class B Funds the Best Mutual Fund?

Best Mutual Fund Investments by Paul JursaThis edition of our investment blog focuses on Class B shares and whether or not they are your best mutual fund choice. While Class A shares sound like they can make an investor more money, you may be better off purchasing Class B shares especially if you plan on holding the low risk mutual funds for a few years. Class B or Class C shares are not lesser shares of the fund, nor is Class A the most important. The biggest difference in Class A shares and Class B shares is what you, as the investor, pay in expenses and what we get paid for placing you in their best mutual fund.

Class A shares have what is known as a “front end load.” This “load” means that sales charges and some commissions are paid up front when the fund is purchased. Class B shares don’t have a front end “load” or sales charge, unlike Class A shares. Class B shares do assess a fee called a Contingent Deferred Sales Charge (CDSC) if the shares are sold before a certain number of years (such as six). Additionally, Class B shares have higher expenses than Class A shares for a period of 4 to 8 years, because the fund is not getting expenses paid up front. Low risk mutual funds generally have both Class A and Class B shares available to investors.

We want you to be comfortable when we help you invest in your best mutual fund that meets the tactical asset allocation models we’ve established. We’ve written this primer to help you become an educated investor so you understand why a particular share class is vital to your capital investment management strategy.

Identifying any Best Mutual Fund – Share Class Basics

Many low risk mutual funds offer different share classes to investors. These share classes are titled Class A, Class B and Class C. The number of shares you own is the same no matter which class you own. If you purchase 100 shares, you will own 100 shares of Class A or Class B or Class C. The fees and expenses are what differentiate the classes.

There are three questions you need to consider prior to deciding on which share class to purchase in your best mutual fund.
1. Is the purchase a short term or long term investment? The length of time you hold the investment affects which share class is the best option to meet tactical allocation strategies.
2. How much are you investing? The bigger the investment, the lower the fees on a percentage basis will be associated with Class A shares.
3. Is the investment large enough to qualify for discounts at purchase? Discounts are available for Class A shares.

The prospectus provided tells you the share classes available for the fund. The most common share classes are Class A, Class B and Class C.

What are Class A Shares?

Class A shares of any best mutual fund will have a sales charge up front or a “front end load.” These charges are deducted right off the top of your investment and can be as high as 6 percent. However, if you make a large initial investment, the fund often offers breakpoints, or discounts, on the sales charge meaning that you, as the investor, pay less in fees allowing you to get more for your investment dollar.

Discounts on your best mutual fund are available if you fall into one of these categories.
• You make a large initial purchase, such as $25,000 or more in the fund. The larger the purchase, the larger your discount.
• You already own shares of the fund. If you currently hold shares in the fund, the investment management company may waive the front end load on subsequent purchases.
• You agree to make regular share purchases from the fund. Low risk mutual funds may reduce the front end load if you agree to make systematic purchases on a regular schedule (i.e., $5,000 every quarter).
• You have other family members that hold Class A shares in the fund. In order to be eligible for this discount, you must agree to link your account with other family members who own shares in the fund.

Your best mutual fund generally offers several breakpoints. The more you invest in the fund, the greater the discount on the sales charges. A sample breakpoint schedule is shown here.
Investment Amount Front End Load Charged
Investment of less than $25,000 6.0% charge
Investment of $25,000 but less than $50,000 5.75% charge
Investment of $50,000 but less than $100,000 4.75% charge
Investment of $100,000 but less than $250,000 3.5% charge
Investment of $250,000 but less than $500,000 2.75% charge
Investment of $500,000 but less than $1 million 1.5% charge
$1 million or more in investment dollars 0% or no front end load

Class A shares are also subject to management and 12b-1 fees. The investment management company charges the same management fee for all share classes of the fund, so they are identical across share classes. The charge that varies among share classes in low volatility mutual funds is the 12b-1 fees. The 12b-1 fees are assessed against the assets and cover the marketing and distribution costs of the fund. Included as part of the share price, they vary across each share class. The 12b-1 fees for Class A shares are usually lower for Class A shares than Class B or Class C shares. This means that the operating expenses on Class A shares held in low risk mutual funds are usually lower over time.

What are Class B Shares?

Class B shares of any best mutual fund don’t charge a front end load. Instead, the fund charges a contingent deferred sales charge (CDSC) if you sell your shares before a time specified in the purchase contract. The CDSC is on a sliding scale and will disappear completely after the stipulated period of time, generally 6 years. The 12b-1 fees tend to be higher with Class B shares than the Class A shares because the investment management company is receiving its fees up front with Class A shares. If the Class B shares are held long enough, there may be no expenses charged to Class B shares.
A sample CDSC is shown below, which is typical for many low risk mutual funds.
Years Since Purchase CDSC:
0-1 year from purchase 6%
1-2 years from purchase 5%
2-3 years from purchase 4%
3-4 years from purchase 3%
4-5 years from purchase 2%
5-6 years from purchase 1%
6 years or longer from purchase 0% or no sales charge

Selling shares while covered under the CDSC period will reduce your overall return on investment.

The majority, but not all, of Class B shares convert to Class A shares after a certain number of years, generally between six and eight. After conversion, they are considered Class A shares and are subject to the lower 12b-1 fees. You will need to keep track of when the Class B shares are due to convert to Class A shares, particularly if the shares of transferred from one brokerage firm to another. If you purchase Class B shares of a fund from us, we will track when the shares convert.

What are Class C Shares – How do they fair?

Class C shares in low volatility mutual funds do not have front end loaded charges. While they do have CDSC, it generally lower than Class B shares, averaging about 1 percent. The CDSC is also in place for a much shorter period of time, usually one or two years.

Like Class B shares, Class C shares charge higher 12b-1 fees meaning they have higher operating costs. Class C shares never convert to another share class. Class C shares have higher fees the entire time they are held.

No Load Mutual Funds

There are low risk mutual funds that have no sales a charge, meaning they have neither CDSC’s or front end loads. The National Association of Securities Dealers (NASD) rules state that the 12b-1 fees may not exceed 0.25 percent of the fund’s average annual net assets.

Comparison of Mutual Fund Classes
Class A Funds Class B Funds Class C Funds
Front End Load Fees Initial sales charge which can be reduced or eliminated by breakpoint discounts NONE Generally none
Contingent Deferred Sales Charge (CDSC) NONE Declines over several years until it reaches 0 Lower CDSC than Class B and gone after 1 year
12b-1 Fees Usually lower than Class B and Class C shares Usually higher than Class A shares Usually higher than Class A shares
Conversion to Class A NONE Convert to Class A shares according to schedule set out in the prospectus No

Is it a Good Idea to Purchase Class B Shares?
When making a significant purchase Class B or Class C shares of low risk mutual funds, generally in amounts over $50,000, you lose the benefit of the breakpoint discounts that Class A shares offer. Before making the decision to purchase Class B or Class C shares of a low volatility mutual fund, consider the following items.

• Read the prospectus for the fund first. Read about the various share classes and the fees associated with each share class. If you plan to make a sizeable investment in any best mutual fund, be sure you understand how the breakpoints work for the Class A shares and if they are even applicable to your investment amount.
• We will review every aspect of the low risk mutual funds we offer with you. Once we find your best mutual fund for your objectives, we will look at the total amount you plan to invest as well as how long you plan to hold the investment. Then we will look at the fees and expenses by share class.
• We will always explain why a particular share class of any best mutual fund works best for your particular situation. We will provide you with tactical asset allocation models that explain why we are purchasing a particular share class in the best mutual fund for you.
• When comparing Class B shares or Class C shares in low risk mutual funds, we will provide you with the breakpoints of the Class A shares from the investment management company. We will work with you to decide if the purchase of Class A shares meets your tactical asset allocation goals both short and long term.
• We will fully disclose our fees and any commissions we earn for each share class, both initially and over the time the mutual fund is held in your investment portfolio.

We take our role in your capital investment management strategies seriously. We will review the disclosure agreement with you. If your best mutual fund that meets your tactical asset allocation models happens to be Class B shares, we want to be sure you fully understand it before signing the agreement.

Get an expert to evaluate your mutual funds with sophisticated software to show you their risks and compare them to some other possibilities that may work well with your investment strategies, contact us and we can show you a few pretty interesting things; like funds that did not lose money in 2001 or 2008.


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