What it means
Mutual funds often offer several share classes that invest in the same portfolio but charge fees differently. Class A shares typically have a front-end load, which is a sales commission taken off the money when you invest.
Class B shares have a back-end load, which is paid when you sell and shrinks the longer you hold. A level-load share class, often called Class C, replaces both with a higher yearly charge.
The fund usually deducts a distribution and service fee, known in the United States as a 12b-1 fee, each year in addition to its normal management expenses. Some level-load classes also apply a small charge if you sell within the first year.
The attraction is flexibility. Because the whole of your money goes to work from day one, you do not lose a slice at the start, and you can leave without a hefty exit charge.
This suits investors who expect to hold for only a short time or are unsure how long they will stay. The drawback is that a higher annual charge compounds over many years.
After a long holding period, the steady cost can exceed what you would have paid as a one-off front-end load. Many advisers therefore recommend level-load shares for short holding periods and lower-cost classes for long ones.
Comparing the options means looking at the total cost of ownership over your likely holding period, not just the headline figure. The fund's prospectus lists the fees for each class, and regulators in many countries publish tools that let you compare them.
In practice
Real-world examples.
Example
A young professional puts $5,000 into a fund and expects to withdraw it within two years to buy a home. She chooses the level-load class to avoid an upfront charge. The higher annual fee costs her less than a front-end load would have over such a short period.
Example
A retired investor plans to keep a fund for at least 15 years. His adviser compares the classes and recommends the one with the front-end load and lower annual cost. Over 15 years, the total cost is lower than that of the level-load option.
Example
A small business owner invests spare cash in a fund and is unsure when she will need it. She picks the level-load class because it lets her sell at any time without a significant exit charge, accepting the higher yearly cost for flexibility.
Formula
Calculation
Value after n years = Amount invested after any up-front fee x (1 + Gross return - Annual expense ratio) ^ n
Worked example: an investor puts $10,000 into a fund that earns 7% a year before expenses. Class A has a 5% front-end load and an annual expense ratio of 0.75%. The level-load Class C has no front-end load and an annual expense ratio of 1.50%.
Class A: starting amount = $10,000 x 0.95 = $9,500, with net growth of 7% - 0.75% = 6.25% a year. After 3 years: $9,500 x 1.0625^3 = about $11,395.
Class C: starting amount = $10,000, with net growth of 7% - 1.50% = 5.5% a year. After 3 years: $10,000 x 1.055^3 = about $11,742.
Over 3 years, the level-load class is ahead by about $347. After 10 years, Class A grows to $9,500 x 1.0625^10 = about $17,419, while Class C reaches $10,000 x 1.055^10 = about $17,081, so Class A is ahead by about $338. The break-even point falls between years 7 and 8.Case study
Seen in the real world.
Bayfield Advisers is a fictional firm that noticed many clients were holding level-load shares for ten years or more. A review showed that the average client had paid about 1.00% a year more in fees than they would have in the lowest-cost share class.
On a typical $50,000 holding, the extra 1.00% cost about $500 in the first year, and the cumulative drag over a decade reached several thousand dollars after allowing for lost growth.
The firm moved long-term clients to cheaper share classes where possible and reserved level-load shares for shorter-term needs. This is an illustrative story, but it reflects a common issue in advice, where the fee structure should match the time horizon.
Watch out
Common mistakes.
- Choosing level-load shares because there is no up-front fee. The fee is not removed, only spread out, and over a long period it can cost more than a front-end load.
- Comparing only the front-end load. A fair comparison must include the annual expense ratio over the full time you expect to hold the fund.
- Forgetting any exit charge. Some level-load classes charge a small fee if you sell in the first year, so check the prospectus.
Questions
People also ask.
What is a Class C share?
It is the common name for a level-load share class. It typically has no front-end load but a higher annual charge, including a distribution fee.
Who benefits most from a level load?
Investors with shorter or uncertain holding periods. For long-term investors, other classes or low-cost index funds are often cheaper.
What is a 12b-1 fee?
It is an annual fee paid out of fund assets to cover marketing and distribution costs, and sometimes shareholder services. In a level-load class, it is typically larger than in other classes.
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