Mutual fund share classes allow the same fund to be offered to investors with different types and sizes of fees. Although this can be done for a variety of reasons, the two most common are so the funds can accommodate:
- Sales charges or “Loads” (don’t know what a load is? Read our Mutual fund fees article).
- Lower fees for larger investors.
This is also done so that financial advisers and brokers can choose the 1 or 2 mutual fund share classes that best fit the way they charge clients for their services. Investors can always go to the mutual fund company directly to find out if there are additional more cost affective share classes available for their situation. This information can be found in the fund’s prospectus which can be requested from your broker or from the mutual fund company directly.
Mutual fund share classes examples
Example 1: Vanguard Total Bond Fund Market Index
For individual investors with less than $5 Million to invest in the fund there are two share classes, which differ based on the amount you have to invest and the expense ratio you pay (don’t know what an expense ratio is? Read our article on Mutual Fund Expenses):
- Investor Shares (Ticker: VBMFX): The minimum investment size for the investor shares is $3000, unless you are investing in an education savings account in which case its $2000. The expense ratio for this share class is .22%.
- Admiral Shares (Ticker: VBTLX) : The minimum investment size for the admiral shares is $10,000. In exchange for the higher minimum required by this share class, you get a lower expense ratio of .10%.
Neither of these share classes carry a load fee.
Example 2: PIMCO Total Return Fund
The PIMCO Total Return Fund has 3 different share classes that are currently available for individuals with less than $1 Million to invest. All have a minimum initial investment size of $1000, and differ based on the type and size of fees you pay.
- PIMCO Total Return A (Ticker: PTTAX) : This share class can carries a load of 3.75% and has an expense ratio of .90%.
- PIMCO Total Return C (Ticker: PTTCX): If you redeem your shares in this fund without holding them for at least 12 months then you pay a 1% load when doing so. If you hold for at least 12 months, then you do not pay a load. However, this share class also carries a much higher expense ratio, of 1.65%. With this in mind, if you are investing for the long term, you are likely to be better off with the A shares, even though you pay an upfront load.
- PIMCO Total Return D (Ticker: PTTDX): This share class carries no load fee and has an expense ratio of .75%. The minimum investment size is $1000. While this share class does not carry a load fee, it is sold only through financial advisors and cannot be purchased from PIMCO directly. Typically, fee-only financial advisors that charge a percentage of assets under management use these shares.
Available to Investors with more than $1 Million:
Pimco Total Return Institutional (Ticker: PTTRX): This share class has no load fee and an expense ratio of .46%. The minimum investment size is $1 Million.
Also Keep in Mind
These are the fees and minimums as stated by the mutual fund companies themselves. When going through a financial advisor or online broker to purchase these funds you may pay a commission to do so as well as higher fees.
What’s the Bottom Line?
Before purchasing a mutual fund either directly from the mutual fund company, through an online broker, or through your financial advisor you want to make sure you understand mutual fund share classes so you know what you are purchasing and what fees and minimums are applicable.