Mutual Fund Class Warfare

Class B shares also tend to have a higher expense ratio, and higher 12b-1 fees than Class A shares. Are there breakpoints for Class B shares? No.

So if you can't get a reduced price for buying in bulk, and the fees are generally higher, when should you buy Class B shares? Buy Class B shares if you are going to hold your fund for a very, very long time. Held long enough, Class B shares eventually convert into Class A shares.

In other words, buying Class B shares gives you squatter's rights: You didn't pay on the way in and you won't pay on the way out as long as you stick around for a long while.

Please note, however, that there has been skepticism about the performance of B shares when compared to A or C shares even after long holding periods. An S&P study published in October states that the higher fees associated with Class B shares caused it to underperform comparable A shares over three-, five- and 10-year periods.

Finally, please don't confuse the back-end loads of Class B shares with redemption fees. Redemption fees are generally short term, often no more than 30 days and are meant to discourage market-timing and frequent trading. For more on redemption fees, please check out Beverly Goodman's article "What's the Difference Between Back-End Loads and Redemptions?"

Pop Quiz

You want to know why understanding the difference between A and B classes of mutual funds is important? Check this out. Last month, Morgan Stanley(MWD Quote) settled with the SEC because its brokers did not inform its customers of higher fees associated with large purchases ($100,000 and higher) of Class B shares of certain proprietary funds. Basically, Morgan Stanley brokers earned more money by selling their customers B shares than A shares because the fees were higher.

Because its brokers did not explain the value of "breakpoints" to their clientele, or put the clients in the proper class of shares in the first place, Morgan Stanley is paying fines totaling $50 million.

Prior to the recently unearthed market-timing scandal, most SEC cases involving mutual funds revolved around brokers' unscrupulously selling B shares to clients instead of A shares.

Class C Shares

Class C shares are level-loaded shares in which the load is paid annually as long as you own the fund. Class C shares cannot be converted to Class A or B shares.

Although the lack of a front- or back-end load might seem the most cost-effective of all possible worlds, in actuality, the never-ending load usually causes long-term Class C shareholders to have the highest expense costs.

So when should you buy Class C shares?

Class C shares make sense for investors looking to hold the fund for a year or two. Hold a Class C share too long and the fees eat away at your return. Hold it for too short a time and you might get hit with a redemption fee.