Identification

• Class B shares are issued by mutual funds that originally had loads. Traditional shares with the load are called the A shares. Class B shares are structured with a declining redemption fee that lasts for several years after shares are purchased. There is no upfront sales charge for purchasing class B shares of a mutual fund.
  
  

Significance

• All classes of shares of a specific mutual fund will have the same portfolio manager, and the assets are pooled for investment purposes. A fund's share price is called the net asset value (NAV) and is calculated by adding up the value of the securities in the fund and dividing by the number of shares outstanding. Class A shares are sold at a price that equals the NAV plus the sales charge. Class B shares are purchased at the NAV price.
  
  

Function

• Class B shares have a contingent deferred sales charge (CDSC). Class B shareholders will pay the CDSC if they redeem their shares in the first several years after purchase. For example, the Putnam family of funds has a CDSC on its class B shares that start at 5 percent in the first year after purchase and decrease each year, until there is no CDSC in the sixth year. Class B shares are also referred to as back-end-loaded shares, in contrast with the front-end-loaded A shares.
  
  

Effects

• Class B mutual fund shares also include extra fund expenses to compensate the selling broker. Mutual fund companies use marketing and distribution fees, also known as 12b-1 charges, to provide compensation to selling brokers. In class A shares the 12b-1 fee will typically be 0.25 percent, while the corresponding class B shares will have a 12b-1 fee of 1 percent.
  
  The extra three-quarters of a percent is charged to the shareholders each year they own class B shares. If a mutual fund investor pays a 5.5 to 6 percent front-end sales charge or pays the extra 12b-1 fees, the net return on A and B shares will be very close after a period of six to eight years.
  
  

Considerations

• For the typical stock fund where the class A shares have a front load of 5.5 to 6 percent and the B shares have an extra 0.75 percent in 12b-1 fees, the results for the two classes of shares will be similar. If the B shares are converted to A shares after the CDSC period runs out, that is an advantage for B share investors. They would be able to buy the B shares without the front-end sales charge and eventually convert them to the lower-expense A shares.
  
  Class A shares will have a lower sales charge for investment amounts of $25,000 to $50,000 and higher. Investors buying $100,000 or more of shares in a family of funds will pay less in total fees if they purchase class A shares.