Is it Best to Buy A, B, or C Shares?

See Which Mutual Fund Share Class is Best For You

mutual fund share classes
Find out which mutual fund share class is best for you. Getty Images

There are several different share classes of mutual funds. The range seems to cover nearly the entire alphabet. There's A, B, C, D, I, K, R, and Z shares. And that's just the ones I've seen before; so there's probably others out there!

Needless to say, the variety of different share classes tends to make the process of buying mutual funds more complex than necessary. But fortunately you've landed on this article, which will help make sense of the main share classes, A Shares, B Shares and C Shares, and after reading it you'll know which one is best for you (or perhaps neither is best).

Basics on Mutual Fund Share Classes

The first and best point to make about mutual fund share classes is that, if you are a do-it-yourself investor, the best share class for you is not technically a share class -- it's no-load funds! Sometimes mutual fund companies will classify no-load funds as "investor shares."

The only good reason to buy A, B or C shares with mutual funds is because you have an advisor or broker that gets paid by commission. If you're not sure why, and you want to know more, you may want to do more homework by reading my article on choosing the best advisor.

Here are the basics on mutual fund share classes:

  • Class A Share Mutual Funds: These funds charge what is called a "front load," which means that you'll pay a percentage of your purchase amount every time you buy shares. Front loads typically range between 3% and 5% but they can be higher. For example, if you buy an A Share mutual fund with a 5% front load, and you're buying $10,000 of shares, you'll pay $500. In different words, you'll end up investing $9,500, not $10,000.
  • Class B Share Mutual Funds: These funds charge a "back load," also called a "contingent deferred sales charge (CDSC), which means you'll pay a percentage of the dollar value of shares sold. This is the opposite of front load funds. You don't pay up front but you do pay when you sell. Fortunately the back load declines gradually while you hold the fund and eventually the load goes all the way down to zero. However, one drawback of B share funds is that they usually have something called a 12b-1 fee, which increases the expenses of the fund. This translates to lower returns while you hold the fund.
  • Class C Share Mutual Funds: These funds charge what is called a "level load," which means there is an ongoing fee, usually 1.00%, as long as you hold the fund. This increases the expenses of the fund and drags down returns, like the 12b-1 fee with B shares.

Which Share Class is Best - A, B, or C?

Again, if you are a do-it-yourself investor, no-load funds are likely your best bet. They typically have low expense ratios and there is no load to pay. This translates to higher returns over time because more of your money is staying in the fund, rather than trickling out into the hands of a stock broker or mutual fund company.

But if you are buying loaded funds, here's the basic breakdown on what's best for you:

  • When A Shares Are Best: Long-term investors (more than 5 years and definitely more than 10) will do best with A share funds. Even though the front load may seem high, the ongoing, internal expenses of A share funds tend to be lower than B and C shares.
  • When B Shares Are Best: If you think you'll sell your shares in about 5 to 7 years, and the back load amount decreases every year, B shares can be a good idea because you won't pay any load up front and you'll pay little or nothing when you sell. Just be sure that the expense ratio is not too high (hopefully not much higher than 1.00%).
  • When C Shares Are Best: This share class is usually the best idea when you'll be holding your mutual fund shares for a short period of time (more than one year but less than three). You don't pay a front load but a back load is sometimes charged if you sell the fund within one year. The ongoing 1.00% level load gets expensive over time, which is why these are best for one to three years.

Most importantly, still try to keep costs as low as possible and only buy funds that are suitable for your investment goals and risk tolerance.