Understanding fees and expenses
Before you can compare share classes, you need to understand the costs that are associated with mutual funds, since these costs are usually deducted from the money you've invested and can affect the return of your investment over time.
Typically, mutual fund costs consist of sales charges and annual expenses. The sales charge, often called a load, is the broker's commission deducted from your investment when you buy the fund or when you sell it. The annual expenses cover the fund's operating costs, including management fees, distribution and service fees (commonly known as 12b-1 fees), and general administrative expenses. The expenses are generally computed as a percentage of your assets and then deducted from the fund before the fund's returns are calculated.
So which share class should you choose? The answer to that depends on two factors: how much you want to invest and your investment time horizon.
Class A shares
Class A shares may appeal to you if you're considering a long-term investment in a large number of shares. When you purchase Class A shares, a sales charge, called a front-end load, is typically deducted upfront, reducing the amount of your investment. Suppose you decide to spend $35,000 on Class A shares with a hypothetical front-end 5% sales load. You will be charged $1,750, and the remaining $33,250 will be invested.
However, Class A shares also offer you discounts, called breakpoints, on the front-end load if you buy shares in excess of a certain dollar amount. Typically, a fund will offer several breakpoints; the more you invest, the greater the reduction in the sales load. For example, a mutual fund may charge a load of 5% if you invest less than $50,000, but reduce that load to 4.5% if you invest at least $50,000 but less than $100,000. This means that if you invest $49,000, you'll pay $2,450 in sales charges, but if you invest $50,000 (i.e., you reach the first breakpoint), you'll pay only $2,250 in sales charges.