Mar 25, 2022 14:42
Class C shares are a type of mutual fund share that have a fixed yearly load that includes expenses for fund marketing, distribution, and service. These fees represent a commission paid to the business or individual assisting the investor in selecting a fund to invest in. Annual fees are assessed.
In comparison, a front-end load costs the investor when the shares are purchased, whereas a back-end load charges the investor when the shares are sold; and no-load funds charge no commissions at all, with the fees simply incorporated into the fund's net asset value (NAV).
Class C shares frequently have lower expense rates than class B shares when compared to other mutual fund share classes. However, their cost ratios are larger than those of class A shares. Expense ratios are used to calculate the total yearly management costs of a mutual fund. As a result, Class C shares may be an attractive alternative for investors with a relatively short-term investment horizon who intend to hold the mutual fund for only a few years.
Officially, the recurring charges that comprise the C-share level load are referred to as 12b-1 fees, after a part of the 1940 Investment Company Act. Annual 12b-1 fees are set at 1%. Distribution and marketing charges may total up to 0.75 percent of the fee, while service fees may not exceed 0.25 percent. While the 12b-1 fee is allocated for marketing purposes, it is mostly used to compensate intermediaries who sell a fund's shares. In some ways, it's a yearly commission paid by the investor to the mutual fund, rather than a transactional commission.
Other mutual fund share classes also charge 12b-1 fees, but to a lesser extent. Class A shares often have reduced costs, compensating for the substantial upfront commissions paid by this group. C-shares often pay the maximum 1% annual expense ratio, and because 12b-1 fees are included in the mutual fund's total expense ratio, their inclusion can boost the annual expense ratio for the class C-shareholder beyond 2%.
Unlike A-shares, class C shares do not have front-end loads, but they frequently do have tiny back-end loads, referred to officially as a contingent deferred sales fee (CDSC), much as class B shares do. However, these loads are substantially smaller for C shares, often under 1%, and normally disappear after an investor holds the mutual fund for a year.
Due to the back-end pressure on short-term redemptions, investors planning to withdraw assets within a year should avoid C-shares. On the other hand, C-shares' greater recurrent expenditures make them a less-than-ideal investment for long-term investors.
When assets with variable fees are kept for an extended length of time—say, in a retirement fund—the discrepancies in eventual values might be enormous. Consider a $50,000 investment in a fund that pays a 6% annual return and levies a 2.25 percent yearly operation fee over a 30-year period. The investor will ultimately get $145,093.83. A fund with the same initial investment and the same annual returns, but with annual running expenses of 0.45 percent, will provide the investor with a much higher end value of $250,832.55.
Class C shares are best suited to investors who want to hold the fund for a limited, intermediate time, ideally more than one year but less than three years. This manner, you can hang on long enough to avoid the CDSC but not long enough to allow the fund's high cost ratio to significantly reduce its total return.