B shares have a "back-end load." This means that the entire initial investment amount is invested into mutual fund shares, but when the investor is ready to sell the shares, a certain percentage is deducted and paid to the mutual fund as commission. Therefore, the investor receives less than the total value of the investment when the shares are sold. B shares can be converted into A shares if the investor decides the front-end load payment structure is more advantageous.
A shares have a "front-end load" fee structure. A certain percentage of the initial investment is taken out as commission up front. Therefore, the total amount invested in the mutual fund is the initial investment amount less the commission.
C shares have a "level-load" fee structure. This means the full amount of money paid to the mutual fund is invested in shares, but commissions are paid annually. This level-load structure is unique to C shares. Also -- unlike B shares -- C shares are cannot be converted into A shares.
Let’s relate all of these differences in an example:
Joe invests his $1,000 in B shares with a 5% commission; he would not pay any commission upfront. But, if he decides to sell his B shares after a 10% gain, he would owe a commission of $1,100 x 5% = $55 when he sells his shares and he will pocket the remaining $1,045.
Now let's assume, Joe invests $1,000 into A shares of a mutual fund. He buys A shares with a 5% commission. With their front-end load structure, 5% of Joe’s $1,000 investment would be deducted immediately as commission. Only $950 of Joe’s money would be invested in mutual fund shares, but he would not owe any more commission fees to the fund. If Joe’s investment grows by 10%, he would keep all of the $1,045 if he sells his A shares after one year.
If Joe buys $1,000 of C shares, because they are level-load shares, the full $1,000 goes toward buying shares. But regardless of the fund's performance, Joe pays an annual commission fee to the fund.
B shares allow investors to pay commission at the end of the investment period. This gives investors the opportunity to invest the entire initial amount into the fund’s shares. But, back-end load commission fees mean investors need to have a higher yield on their investment in order to achieve a positive return once the shares are sold and the commission is paid.
Funds must disclose their fees to potential investors. Most advisors consider expense ratios of less than 1% to be reasonable.