Credit: Shutterstock photoA particular mutual fund may have the letters A, B, C or I associated with it. They represent the share class the multi-class mutual fund has to offer. For example, Fidelity Advisor Value Fund has different share classes for the same investment portfolio - Fidelity Advisor Value A (FAVFX), Fidelity Advisor Value B (FBVFX), Fidelity Advisor Value C (FCVFX) and Fidelity Advisor Value T (FTVFX).
These funds have a similar investment portfolio of securities and have the same investment objective. The difference among them is that they have different shareholder services and/or distribution arrangements. The share classes are differentiated generally based on their different expense ratios, minimum investments, and sales loads. Subsequently, the different share classes will have varying investment return. Also, while A, B or C and others are generally for retail investors, the Institutional funds - represented by Class I or Class Y are for institutional investors and demand a very high minimum initial investment.
The Need for Different Share Classes
As mentioned, all classes of mutual funds have similar interests in portfolios and have identical investment policy. Also, they have the same managers. So the obvious question that emerges is why do funds have different share classes?
Different share classes offer investors the varied fees and expenses structure options. Investors would pick funds accordingly, depending on their investment goals. So, while A, B or C may attract the retail investors, institutional class shares have fees and expenses structure chalked out for institutions. The different classes also enable investors to identify for how long they want to remain invested; pension funds for example.
Offering the same investment portfolio under different share classes is a better option than having different mutual funds. A particular mutual fund may appeal to both retail and institutional investors, who may then chose from the share class that best suits them.
Share Classes: It is Mostly about Expenses
Class A : These funds generally carry front-end sales charge. These are fees that an investor must pay at the time of investment. The front-end sales load is deducted from the invested amount, and the remaining portion is used to buy funds. As it eats into the initial investment amount, many A class funds may lower the management expense ratios. So, holding these funds for a longer term may help investors save costs. (Read: Skip Sales Load: 3 Top No-Load Funds to Buy )
Class B : These funds carry contingent deferred sales load. These are fees that an investor must pay while selling the funds. In many cases, the deferred sales loads are dissolved, thus reducing the deferred charges in long run. Once a fund stops having back-end charges, it becomes an A class share. However, fund houses may then charge high management expense ratios. Also, B class shares may also carry 12b-1 fees. The 12b-1 fees are operational expenses and range from 0.25% to a maximum of 1% of the fund's net asset. The largest portion of these expenses is attributable to the fees paid to the fund managers or investment advisors. (Read: Beware of Load Fees in Mutual Funds )
Class C : These funds are usually the constant-load funds, and may carry both front-end sales load and deferred sales load. No matter the number of years an investor holds these funds, he has to pay the prevalent charges. However, these funds may have lower sales load than A or B class shares. Nonetheless, expense ratios are generally higher and carry a 12b-1 fee. C class shares do not reclassify into A class shares. (Read: Pay Less to Earn More: 3 Low-Expense Funds to Buy Now )
Institutional Class : These are funds generally for investing institutions as they carry very high minimum initial purchase amount. The class may or may not carry sales load and have lower expense ratios. They are typically referred to as class I or class Y shares. Large money managers usually buy a huge chunk of shares in a mutual fund at one go, and are thus offered the low expense ratios. The minimum initial investment amount can be $500,000 or more.
Class R: These are generally retirement plans like the 401(k) plans. They usually will not carry a sales load and have low 12b-1 fee.
One Fund, Many Classes
Let's take the example of BlackRock Basic Value Fund and compare its share classes. This fund has 5 share classes. Class A - BlackRock Basic Value Investor A (MDBAX), Class B - BlackRock Basic Value Investor B (MBBAX), Class C - BlackRock Basic Value Investor C (MCBAX), Institutional -BlackRock Basic Value Institutional (MABAX) and Class R - BlackRock Basic Value R (MRBVX).
** Under automatic investment program (AIP), investors need to contribute money every month ( Read: 3 Best Mutual Funds to Buy for Just $100)
The investment objective states that the fund invests almost all its assets in Master Basic Value LLC. The fund focuses on purchasing common stock issued by domestic companies. The market capitalization of these companies must exceed $5 billion. It seeks to acquire stocks which are attractively priced relative to their underlying value.
All the share classes of BlackRock Basic Value Fund carry a Zacks Mutual Fund Rank #1 (Strong Buy) .
We expect these funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
So, the screening process for investors should not only end with identifying the right mutual fund, but they also need to know which class of the fund is best for them.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center .
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Get Your Free (FAVFX): Fund Analysis Report
Get Your Free (MDBAX): Fund Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
