Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

B Shares

What it is:

B shares are a type of mutual fund share.  They are distinguished from A shares and C shares by their load (fee) structure.

How it works (Example):

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. 

Why it Matters:

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.

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