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Multi-Class Mutual Funds

A mutual fund may offer different classes of its shares to investors. Although each class will share the mutual fund’s portfolio of investments and the fund’s investment objectives, the classes of shares in the fund may vary in cost and fee structures according to the period of time the shares are held. Because such fees and costs affect performance of a fund, the class of shares an investor in the fund should consider purchasing may be affected by the length of time that the investor expects to hold the shares.

Rules and regulations have been issued by the Securities and Exchange Commission pursuant to the Investment Company Act of 1940 to regulate issuance of classes of mutual fund shares. SEC Rule 18f-3 in particular provides that a registered open-end management investment company or mutual fund may issue more than one class of voting stock provided that each class:

  • Shall have a different arrangement for shareholder services or the distribution of securities or both, and shall pay all of the expenses of that arrangement;
  • May pay a different share of other expenses, not including advisory or custodial fees or other expenses related to the management of the company’s assets, if these expenses are actually incurred in a different amount by that class, or if the class receives services of a different kind or to a different degree than other classes; and
  • May pay a different advisory fee to the extent that any difference in amounts paid is the result of the application of the same performance fee provisions in the advisory contract of the company to the different investment performance of each class

A typical multi-class mutual fund might include the following four types of classes:

  • A class of shares for which purchasers are charged a fee upon purchase of the shares (the fee is otherwise known as a front-end sales load);
  • A class of shares with a 12b-1 annual service fee and without a purchase fee or front end sales load but with a deferred sales charge (a contingent deferred sales load) that decreases with the length of time the shares are held;
  • A class of shares on which annual fees and purchase or deferred sales charges are imposed but at lower rates than either of the two classes above; and
  • A class of shares with separate charges for purchase by institutional investors.

To obtain better performance, an investor who intends to hold shares of the mutual fund for a longer period of time would opt for the second class above with no purchase fee and a deferred charge that decreases with the length of time the shares are held.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.


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