Share Class

• Mutual funds sell many different types of shares, known as share classes, but two of the most commonly known are A shares and B shares. A shares are front load shares on which you must pay an upfront commission. B shares are shares on which you pay a fee only when you redeem them. On a typical A share, you normally pay an upfront fee of between 4 and 5.5 percent, although firms can charge as much as 8.5 percent. On a B-share you pay a similar fee if you sell your shares within a year, but the sale fee decreases every year, until after seven years you pay no fee. The ability to avoid fees makes B shares more attractive to some investors than A shares.
  
  

Management Fees

• The upfront fee you pay for purchasing A shares amounts to a commission that the fund splits with the company that sold you the fund and the broker who actually made the sale. You also have to pay annual management fees that cover the fund's operating costs. However, fees paid for A share management fees are much lower than fees paid for other types of shares. Over a period of six or seven years, A shares become less expensive than B shares due to the annual cost savings. The Securities and Exchange Commission requires fund companies to automatically convert B shares to A shares after a period of seven years to prevent back-end load shareholders having to pay excessive fees.
  
  

Investment Horizon

• When you buy A shares, your broker receives an upfront commission; consequently, brokers have an incentive to encourage investors to buy A class shares. However, you should only buy A shares if you plan to hold on to an investment for several years. If you want to hold shares only for a short period of time, such as a year or 18 months, you can buy C class shares that have no front load and a back load of just 1 percent. Annual expenses are higher, though, so if you plan to hold shares for seven to 10 years then A shares work out cheaper.
  
  

Avoiding Upfront Fees

• You can exchange mutual funds that you currently hold for other funds operated by the same investment company, without having to pay a front or back end load. Since mutual fund companies charge much lower front load commissions on bond funds than stock funds, some people buy A class bond fund shares and then exchange those funds at a later date for shares of stock funds. However, you should check with your fund company to see if any limitations exist on share exchanges.