Understanding Mutual Fund Share Classes (2024)

You have to be careful in the supermarket cookie aisle. If you’re in a hurry and thoughtlessly grab a package of Oreos, you might get a rude surprise at home when you bite into an unexpected flavor from the company’s growing menu, such as peanut butter, birthday cake or lemon.

The need for vigilance is greater — and the stakes higher — when you’re shopping for mutual funds. Fund firms have a dizzying array of share classes for their funds. If you find a fund you like, you may have to decide which of its varieties is right for you. Different companies offer different options, but the share classes you might see include A, ADV, B, C, F, I, J, K, L, M, N, R, S, T, V, W, Y and Z.

Some classes and names are simply marketing ploys. Jensen Investment Management named its retail investor class “J” to reinforce the company’s name. Vanguard’s “Admiral” class is a nod to the HMS Vanguard, the British ship that inspired the firm’s name. And Karner Blue Capital named its only fund class “Butterfly” for the endangered Karner blue butterfly.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%
Understanding Mutual Fund Share Classes (1)

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Indeed, there is no standard for naming fund share classes. The labels can have different meanings from fund to fund. “Deciphering mutual fund share classes can be a time-consuming and overwhelming process for retail investors,” says Matthew Garasic, a fee-only financial adviser in Pittsburgh.

Fund share classes, in addition to having different rules about who can purchase them and varying minimum initial investments, usually charge different expense ratios. In some cases you could pay a separate sales charge, too. Those costs can add up. “The share class an investor chooses can have a long-term impact on wealth accumulation,” says Garasic.

To help you figure out which share class of any given mutual fund is right for you, we’ll break down common share classes and offer some guidelines to keep in mind as you shop for funds.

The main reason mutual fund companies create share classes is to pay the assorted middlemen that sell their funds, such as financial advisers, insurance companies, brokerage platforms and 401(k) plans, among others, says Eric Jacobson, a director of the research firm Morningstar.

The compensation for these intermediaries often comes out of the funds’ fees, hence the different share classes and their wide-ranging expense ratios. “It is all driven by dollars,” says Jacobson. The dividing lines between share classes boil down to three factors:

  1. Sales charges: In mutual fund speak, a “load” fund imposes a sales charge or commission when you buy or sell shares. Front-end-load classes, typically labeled “A” shares, levy a median toll of 4.25% when you purchase them. These shares are commonly sold through advisers, who pocket the load as a commission.
    On the flip side, share classes with a back-end load, typically labeled “B” and “C,” can charge you on the way out, when you sell them. B and C share classes often have higher expense ratios than A shares.
  2. Initial investment size: Share classes typically vary by initial minimum investment, too. Some are built for deep-pocketed investors, such as pension funds and retirement plans. These classes, often called Institutional or I shares, can require large initial deposits of $500,000 or more. In return, institutional shares typically have low expense ratios.
    Some fund firms also offer a break on annual fees for individual investors who are willing to fork over heftier minimum initial investments. For instance, investors can buy the investor class of the Vanguard Wellington fund for an initial outlay of $3,000 and pay 0.25% in fees per year. But for an initial investment of $50,000, the fund’s Admiral share class charges 0.17% in annual fees.
  3. Channel. Where you hold your fund shares — in a personal account or a 401(k), for example — or whether you use a financial adviser, may dictate the share class you own. In a 401(k) investment plan, you may be offered the I share class of T. Rowe Price Mid-Cap Growth. If your adviser purchases fund shares for you, they will likely be Advisor shares. But if you buy shares in the fund on your own, you’ll get the investor shares.
    Every class charges a different expense ratio: Mid-Cap Growth Advisor charges 1.02% in annual fees, the investor share class charges 0.77%, and the I share class charges 0.63%.

In addition, each brokerage negotiates its own deal with fund firms, says Steve Sanders, executive vice president of marketing and product development at Interactive Brokers.*

Finally, some fund firms create share classes to sell on broker platforms. For example, although American Funds’ A shares are generally adviser-sold, the firm’s F-1 share class is open to anyone, without a sales charge, at online brokers such as Fidelity and Schwab. The F-1 shares typically sport a slightly higher expense ratio than the A shares, but the difference is small.

The best way to navigate this alphabet soup is to stick with funds that trade free of commissions and transaction fees at your online broker, such as those available from Schwab’s Mutual Fund OneSource, Fidelity’s FundsNetwork or E*Trade’s menu of funds.

If a fund is offered in a no-fee network, there’s usually just one share class available, so there’s no choosing required. And you won’t pay a front-end or back-end load. But you may pay the brokerage a short-term-trading fee if you turn around and sell the shares within 60 or 90 days, depending on the firm.

If you must pay a sales charge to buy a fund, opt for the share class with the lowest expense ratio, if a choice is available, and plan to hold the shares for the long haul. And consider checking the full list of your fund’s share classes to make sure you’re getting the best deal available to you.

Morningstar lists all the share classes of any given fund, including symbols, loads, expense ratios, investment minimums and purchase constraints (institutional, say). Just look up a fund, then scroll down the landing page to “Review Other Classes.”

The Fund Analyzer tool from the Financial Industry Regulatory Authority also lists each fund’s share classes and lets you compare up to three classes to see how their respective fee schedules may impact potential returns over time — three or 10 years, say, assuming a certain annualized return. However, you’ll have to check with your brokerage firm to find out which classes are available to you.

The complexity of mutual fund share classes may be one reason investors are flocking to exchange-traded funds. “All the different mutual fund share classes can create the perception of special deals for some people,” says Danan Kirby, a vice president at Ariel Investments. ETFs trade commission-free at most brokerages and charge all investors the same expense ratio. “Simplicity is beauty. Everyone gets the same deal,” says Kirby.

* A previous version of this article stated that Charles Schwab charged a load for the A class shares of the John Hancock Regional Bank fund. A Schwab spokesperson says that its website failed to display a footnote that explains that it waives the sales charge.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you makehere.

Related Content

  • 9 Best Fidelity Mutual Funds to Buy Now
  • How to Find the Best Mutual Funds for Beginners
  • 14 Nasdaq-100 ETFs and Mutual Funds to Buy

As an experienced financial advisor with a keen understanding of mutual funds and investment strategies, I can confidently delve into the complexities of navigating the world of mutual fund share classes. Let's dissect the concepts mentioned in the article:

  1. Mutual Funds and Share Classes: Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities. Share classes represent different versions of the same mutual fund, each with its own fee structure and eligibility criteria.

  2. Sales Charges (Loads): Some mutual funds charge sales commissions, known as loads, which can be front-end (paid when purchasing shares) or back-end (paid when selling shares). Share classes with loads are typically labeled A, B, or C shares.

  3. Expense Ratios: Expense ratios represent the annual fees charged by mutual funds to cover operating expenses. Different share classes within the same mutual fund may have varying expense ratios.

  4. Initial Investment Size: Share classes often have different minimum initial investment requirements. Institutional shares (I shares) typically require larger investments but offer lower expense ratios compared to retail investor shares.

  5. Channel of Investment: The channel through which investors access mutual funds, such as personal accounts, 401(k) plans, or through financial advisors, may dictate the share class available. Advisor shares, for example, are often sold through financial advisors.

  6. Brokerage Deals and Share Classes: Brokerage firms negotiate deals with mutual fund companies, influencing the availability of share classes and associated fees for investors.

  7. No-Fee Networks: Some brokerage platforms offer mutual funds with no transaction fees or commissions, simplifying the investment process for investors. In such cases, there is typically only one share class available.

  8. Comparison Tools: Tools like Morningstar and FINRA's Fund Analyzer provide information on mutual fund share classes, including fees, minimum investments, and purchase constraints, helping investors make informed decisions.

  9. Exchange-Traded Funds (ETFs): ETFs are alternative investment vehicles to mutual funds, offering simplicity and uniformity in fees. Unlike mutual funds, ETFs typically trade commission-free and have a single share class.

By understanding these concepts and conducting thorough research using available tools and resources, investors can make informed decisions when selecting mutual funds and navigating the complexities of share classes.

Understanding Mutual Fund Share Classes (2024)
Top Articles
Latest Posts
Article information

Author: Dan Stracke

Last Updated:

Views: 6230

Rating: 4.2 / 5 (63 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Dan Stracke

Birthday: 1992-08-25

Address: 2253 Brown Springs, East Alla, OH 38634-0309

Phone: +398735162064

Job: Investor Government Associate

Hobby: Shopping, LARPing, Scrapbooking, Surfing, Slacklining, Dance, Glassblowing

Introduction: My name is Dan Stracke, I am a homely, gleaming, glamorous, inquisitive, homely, gorgeous, light person who loves writing and wants to share my knowledge and understanding with you.