How to Know Which Share Class is Best When Buying a Mutual Fund

Investors who buy mutual funds through a broker or other financial intermediary will usually have to pay some sort of sales charges for the advice that the broker gives them in choosing the funds. The different ways to pay these charges come in the form of Class A, Class B and Class C shares.

Class A Shares

For A shares, investors will normally be charged a front-end load, or a one-time sales fee paid up-front that can range anywhere from 2% to 8%. Also, A shares, like all classes of mutual fund shares, charge annual expenses.

These expenses usually consist of a 12 b-1 fee that pays for the fund's marketing and distribution expenses, a management fee that the fund pays to its investment adviser for managing the fund and a fee for operating expenses. These expenses can vary according to the fund company, but experts agree that they're usually lower for an A share than a B or C share.

For long-term investors, many market watchers say the A shares are the best way to go because over a long period, the investor will have spent less thanks to the lower annual fees.

Class B Shares

B shares have a "back-end load," or a contingent deferred sales charge payable when the investor sells his or her shares. This back-end load is often slightly lower than a front-end load, but the annual expense fees are usually higher than those of A shares. The back-end charge usually declines the longer the shares are held and is often eliminated after a period of time (usually around six to eight years). At that point, B shares convert to A shares, meaning that investors start paying the lower expense ratio of the A shares and no longer have to pay the back-end load.

"Over a seven-to-10-year period, A and B work out to be consistently even," says Mark Wilson, a certified financial planner with Tarbox Equity in Newport Beach, Calif. Wilson. "If you're going to hold it for that time frame, it really doesn't make much of a difference."

Class C Shares

Meanwhile, investors with a shorter time frame, of around three years or less, could find a good bet in C shares, also known as "level load" shares.

C shares do not impose loads, but like B shares, they impose a higher expense ratio than A shares. Unlike B shares, C shares normally don't convert to A shares, so holders of these shares can go on paying this hefty expense ratio indefinitely. That's why it's only good to hold these share classes for a few years.

C shares also sometimes charge a fee if the holder sells them before a certain period is up, usually one year.