Mutual funds are a popular way for people to invest. By pooling investor money they can diversify across more securities and provide the kind of attention to the portfolio that not all investors can match. Sometimes, an investor can be helped in their selection of mutual funds by a financial professional. Of course, this service comes at a cost. These costs are charged to investors in different ways depending upon how the investor purchases the fund. Class C mutual fund shares are one of the structures that is used to implement these expenses.
There are three main classes of mutual funds, Class A, Class B, and Class C. Some funds do not have all three classes and some funds have additional classes. However, these three classes are considered the "standard" classes.
Class C mutual funds are also known as level load mutual funds. Instead of charging any sort of commission or sales charge when the shares are purchased or sold, Class C shares have a higher expense ratio. This higher ongoing expense functions to compensate the broker or firm that sold the shares just like with the loads of other share classes, but it does so over the life of the investment instead of all at once.
Class C shares will appear on statements or other paperwork with a C after the mutual fund name, or there may be a fuller identification like "Class C" or "Class C Shares". For example, "XYZ Growth Fund C" may be one way to display the name, and "XYZ Growth Fund Class C" might be another.
When mutual funds are sold through a broker or other financial institution, that institution is usually the first point of contact for the investor who owns the mutual fund. They are compensated for both making the sale, and for that service via a commission from the mutual fund company. In the case of Class C shares, this commission comes in the form of a higher 12b-1 fee charged by the fund, much of which is passed on to the broker.
Class C shares are most often priced with an expense ratio of 1% higher than their comparable Class A shares. This will result in lower annual returns. However, the overall return may still be higher because no sales charge is deducted from the original C share investment like it is from an A share investment.
Because C shares have neither a front load nor a back load, they are occasionally mistaken as no-load shares. This is not true. The higher C share expense ratio is consider its load. Because this load is the same over the life of the investment, it is called a level load.