Class c shares

What Are Class C Shares?

Class C shares are a type of share class offered by mutual funds, primarily distinguished by their fee structure within the broader category of investment products. Unlike Class A shares which typically charge an upfront sales load, or Class B shares with a contingent deferred sales charge that declines over time, Class C shares generally do not impose a front-end sales charge. Instead, they feature higher ongoing annual fees, often including a significant 12b-1 fees and sometimes a smaller contingent deferred sales charge (CDSC) if redeemed within a short period, typically one year. All share classes of a mutual fund, including Class C shares, invest in the same underlying investment portfolio and share the same investment objectives and policies; only their fee structures differ.³³,³²,³¹

History and Origin

The concept of mutual fund share classes emerged to provide investors with flexibility in how they pay for fund distribution and services, evolving significantly after the modern mutual fund industry began in the United States in the 1920s.,³⁰ The introduction of different share classes, including Class C shares, was a response to varying investor needs and preferences regarding sales charges and ongoing expenses. A significant development in this regard was the adoption of Rule 12b-1 by the Securities and Exchange Commission (SEC) in 1980. This rule permitted mutual funds to use a portion of their assets to pay for marketing and distribution costs, allowing for the creation of fee structures that did not rely solely on upfront sales loads.²⁹,²⁸ Class C shares, with their emphasis on ongoing 12b-1 fees and often a short-term CDSC, became a common offering, especially appealing to those seeking to avoid initial sales charges.²⁷

Key Takeaways

• Class C shares typically do not have a front-end sales charge, allowing the full investment amount to be deployed immediately.²⁶,²⁵
• They carry higher ongoing annual expenses, primarily due to higher 12b-1 fees compared to Class A shares.²⁴,²³
• A contingent deferred sales charge (CDSC) may apply if Class C shares are redeemed within a short, specified period, often 12 to 18 months.²²
• Class C shares generally do not convert to other share classes, meaning the higher ongoing fees continue for as long as the shares are held.²¹,²⁰
• They are often considered for investors with shorter-term investment horizons, typically five years or less.¹⁹,¹⁸

Interpreting Class C Shares

When evaluating Class C shares, investors should focus on the total cost of ownership over their anticipated holding period. While the absence of an upfront sales load might seem appealing, the higher ongoing expense ratio, driven by higher 12b-1 fees, can significantly erode returns over time. The prospectus for a mutual fund will detail the specific fees associated with Class C shares, including the 12b-1 fee percentage and any applicable contingent deferred sales charge schedule. Understanding these fees is crucial, as even small percentage differences can compound over years and impact the investment's final value.¹⁷,¹⁶,¹⁵

Hypothetical Example

Consider an investor, Sarah, who has $10,000 to invest in a mutual fund. She is evaluating two options from the same fund family: Class A shares and Class C shares.

Class A Shares:
Assume a 5% front-end sales load and an annual expense ratio of 0.75%.
Initial Investment: $10,000
Sales Load: $10,000 * 0.05 = $500
Amount Invested: $10,000 - $500 = $9,500
Ongoing annual expenses would be 0.75% of the net asset value.

Class C Shares:
Assume no front-end sales load, an annual expense ratio of 1.50% (higher 12b-1 fees), and a 1% CDSC if redeemed within one year.
Initial Investment: $10,000
Sales Load: $0
Amount Invested: $10,000
Ongoing annual expenses would be 1.50% of the net asset value.

If Sarah plans to hold her investment for only two years and the fund grows at 5% annually before fees, the Class C shares might appear more attractive initially due to the full investment immediately. However, if she held the Class A shares for a long-term investment of 10 years or more, the lower ongoing expense ratio of Class A shares would likely result in a higher overall return despite the initial load.

Practical Applications

Class C shares are most frequently encountered by individual investors through financial professionals or directly from fund companies. They are often chosen by investors who anticipate a shorter holding period for their investment or those who prefer to avoid an upfront sales charge, even at the cost of higher ongoing fees. This share class can be suitable for tactical shifts in a portfolio or for investors who are uncertain about their long-term commitment to a particular fund. However, for investments within a retirement plan, other share classes, such as Class R shares or institutional shares, may be available with different fee structures, sometimes lower or no sales loads.¹⁴,¹³, Investors can utilize tools provided by regulators, such as FINRA's Fund Analyzer, to compare the fees and expenses of various mutual funds and their share classes to determine the most suitable option for their investment goals.¹²

Limitations and Criticisms

A primary criticism of Class C shares revolves around their higher ongoing fees, particularly the 12b-1 fees, which can significantly reduce long-term returns compared to other share classes.¹¹,¹⁰ While these fees are intended to cover distribution and marketing costs and compensate financial intermediaries like broker-dealers and investment advisors, their continuous nature can make Class C shares more expensive over extended periods. The Securities and Exchange Commission (SEC) has historically scrutinized 12b-1 fees due to concerns about their impact on investor returns and transparency.⁹,⁸ In 2018, the SEC even launched an initiative urging investment advisory firms to self-disclose instances where clients were placed in higher-cost share classes (like those with 12b-1 fees) when lower-cost alternatives were available for the same fund.⁷ This highlights the importance of investors being aware of all costs and potential conflicts of interest when choosing a share class.⁶

Class C Shares vs. Class A Shares

The fundamental difference between Class C shares and Class A shares lies in their fee structures, which influences their suitability for different investment horizons. Class A shares typically impose a sales load at the time of purchase (a "front-end load"), which reduces the initial amount invested. However, Class A shares usually have lower ongoing annual expenses, including lower 12b-1 fees.⁵,⁴. Conversely, Class C shares generally do not have a front-end load, meaning the entire investment amount is immediately put to work. Their costs are primarily ongoing annual fees, particularly higher 12b-1 fees, and sometimes a smaller contingent deferred sales charge if redeemed shortly after purchase. While Class C shares may be more economical for shorter holding periods (often considered less than five years),³ Class A shares tend to be more cost-effective for long-term investors due to their lower recurring annual expenses, especially for larger investments that may qualify for sales charge discounts known as "breakpoints."²,¹