Class C Share: Meaning, Pros and Cons


Meaning Of Class C Share

Class C share refers to one of the types of Mutual fund shares characterized by level-load that means full amount of money paid by investor is put into shares. These shares do not have front-end load and back-end load unlike other Class A and Class B shares of Mutual fund where commission is deducted from amount invested in mutual fund. Front-end load means when an investor puts particular amount of money in mutual fund, a certain amount from initial value of investment is deducted out as commission such that less money is invested in mutual shares than initial payment amount. Back-end load means entire amount of initial investment is put into mutual shares, but when investor sell out this share then certain amount is deducted out of sale value and paid as commission to mutual fund. Under class C shares, instead of paying commission to mutual fund, fees are paid in the from of annual charges by investors for entire life of their investment. This annual fee is computed on the basis of Net asset value of fund and comprise charges for fund marketing, distribution and servicing that are decided at fixed rate. 

Class C shares carries less expense ratios as compared to Class B shares and have high expense ratio over the Class A shares. The expense ratios of class C share reflects overall yearly management expenses for running a mutual fund. Annual charges constituted within the class C share level load are officially termed as 12b-1 fees that is named from section of 1940’s Investment Company Act. A total of 12b-1 fess is capped at 1% on annual basis making 0.75% for marketing expenses and 0.25% for service fees. 

Pros of Class C shares

The pros of Class C shares are as discussed in points given below: – 

Free from front-end fees: Class C shares are free from any front-end fees unlike the class A shares where commission is deducted from initial value of investment that is put into mutual fund. There are no such deductions in Class C share and entire amount of capital goes into investment thereby yielding good returns from interest.  

Lack of back-end load: These shares carry possibility of not doing the payment of back-end load. It is due to the reason that Class C share is lifted only if it is hold on for over a year by investor. And if in case, back-end fees are to be paid then it can be set at nominal charge of 1% only.   

Good intermediate term investment- The class C mutual fund shares is regarded as ideal option for economically-minded investors having a short time horizon for investment ranging from one to three years. These shares have large amount of ongoing expenses associated with them, thereby making them a less-then-ideal option for long-term investors. 

Cons of Class C Shares

Various disadvantages of Class C shares are as follows: – 

Back-end load charged: Class C share involves the payment of back-end fees although it is lower. The charges need to be made by investor if they are selling off their shares within the first year. 

High expense ratios: The expense ratio of Class C share is higher than Class A but lower than Class B share. Such ratio simply denotes the overall annual cost of managing funds held by investor. 

Zero scope for conversion: These shares have zero scope for conversion unlike class B shares where investor can easily convert them into class A shares. This means that investor do not get any chance with class C shares to bring down their expense ratios. In addition to this, if investor hold on these shares for longer term, then fees will rise with time and returns will be lowered.   

No rebates: Investors under class C shares do not get any concessions on costs incurred during the process of account reaching any level. 

Who should do investment in class C shares?

Investors who are willing to withdraw fund within a year should avoid class C shares due to the involvement of back-end load charges on short-term redemptions. Also, class C shares have large ongoing expenses associated with them, thereby making it a less-than-ideal option for long-term investors. 

Final values of investments can differ a lot in case of varying fees, when it is held for a substantial period, i.e., in a retirement fund. Let’s take an example, an investment of $50,000 in a fund with 6% return and annual operating charges of 2.25% is held for 30 years. The final amount receivable to investor will amount to $145,093.83. On the other hand, a fund with similar amount of investment and similar annual returns, but with annual operating fees of 0.45% will provide investor with significantly higher amount equal to $250,832.55. 

The Class C shares proves out to be a very suitable investment option for individuals who are planning to hold fund for limited and intermediate time period, that is more than one year but less than three years. This way, investors can hold on these shares long enough for avoiding the contingent deferred sales charge (CDSC), but not for so long that high expense ratio will make major toll in overall return of funds. 

Example of Class C shares in real world

An example of fund with both class A and Class C shares is Calamos Growth Fund. The expense ratio charged in class A shares is 1.40% out of which 0.25% is 12b-1 fee. Front end load is at maximum of 4.75% that gets decreased on the basis of amount invested. However, there is no front-end load in mutual fund class C shares but carries CDSC at maximum of 1% on shares hold on for less than one year. Class C shares do impose maximum 1% 12b-1 fee, that pushes the overall expense ratio of fund to 2.15%. 

Therefore, it can be concluded that classes of mutual fund suits best to individuals either looking for short-term or long-term investment option. Each share class has its own merits and demerits that makes it essential for investor to ascertain the right class of shares prior to venturing in. Amount of investment and time horizon are two most important way of finding out right class shares. 

Investors with high amount of capital and can wait for longer time period should go for Class A shares. Investors who have less amount to invest but can wait for a long before withdrawal is made should opt for Class B shares. And finally, Class C shares are best option for investors looking for short term investments.