Did you know that mutual funds are categorized into specific share classes? In the U.S., there are three principal classes — A, B and C. These three classifications are important to pay attention to when you are investing. While these classes are not specifically tied to potential returns, they will help you maximize your returns.
Class A Shares
Typically, Class A shares will have front-end load fees that are as high as 5 percent. This percentage is calculated by the total amount that you deposit into a fund. As you can see, this will quickly reduce the short-term gains that you may acquire. You are behind by 5 percent before you even get started. However, you should be looking at Class A shares as long-term investments. The history of returns for certain mutual funds in this classification may be high. That would offset the front-end load fees you would pay. Also, some of these funds will reduce the fee down to between 2 to 3 percent if you invest a larger sum of money into their mutual fund — this amount is usually listed at $25,000 or more.
Class B Shares
You will not have to worry about a front-end fee if you decide to invest in Class B shares. However, you will likely pay backend load fees for mutual funds in this classification. Similar to Class A shares, the fees can reach as high as 5 percent of the total amount that you redeem. If you invested in some funds that really increased in value, you could end up paying quite a bit on the backend fee. If you do choose to invest in this classification, try to find a mutual fund that converts into Class A shares after a specified period of time.
Class C Shares
This classification of mutual funds is designed for individuals who have a shorter investment timeframe — withdrawals may be made every couple of years. You do not have to pay a front-end load fee with Class C shares and typically, the backend load will be equivalent to 1 percent or less. You will find that some mutual funds in this classification have no back-end load fees at all. However, this classification will usually have higher expense ratios and maintenance fees to make up for the lack of backend and front-end loads.
It is best to write down the investment goals for your mutual funds before you do your research. This will make it easier for you to choose a classification.