What are C Shares?
How Do C Shares Work?
The main aspect that differentiates C shares from A shares and B shares is that C shares are level-load. This means the full amount of money paid to the mutual fund is invested in shares. Commissions for level-load shares are paid to the mutual fund through annual fees. This level-load structure is unique to C shares.
A shares have what is called a "front-end load." Front-end load means an investor invests a certain amount in a mutual fund, but a certain percentage of the initial investment is taken out as commission. Therefore, there will be less money invested in mutual fund shares than the initial payment amount.
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. Another point of difference between C shares and B shares is that B shares can be converted into A shares if investors decide the front-end load payment structure of A shares is more advantageous. However, C shares may not be converted into A shares.
Let’s relate all of these differences in an example:
Joe invests $1,000 in C shares of a mutual fund. Because they are level-load shares, the full $1,000 amount that Joe pays for the shares is invested. However, Joe does have to pay an annual commission fee.
Now, let’s say Joe bought 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 decided to invest 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 and pocket the remaining $1,045.
Why Do C Shares Matter?
C shares allow investors to spread out commission payments, and they also enable the entire investment amount to be invested in the fund from the start. But because C shares cannot be converted into A shares (unlike B shares), the investor is locked into the annual commission payment structure and my incur a higher management expense over time.
Funds must disclose their fees to potential investors. Most advisors consider expense ratios of less than 1% to be reasonable.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Building good credit is like trying to lose weight -- it takes time, effort and persistence to reach...Read More →
Four states are teetering on the edge of failure. These four states make up over 25% of the United States' GDP...Read More →
They say there is safety in numbers. That may be true heading into battle, but it's not necessarily true in the investment world. Whether it's tulips, dot-com...Read More →