A-Share: Definition, Charges, and Examples

What is an A-share?

An A-Share is a class of shares offered in a family of multi-class mutual funds. A-Shares are a common class offered to retail investors. They are usually characterized by a front-end sales charge if they are purchased through a full-service broker or financial advisor.

A-shares are a type of mutual fund shares that have front-end sales loads, which are commission fees that are paid upon purchase. A-shares are intended for private investors and usually do not have any additional charges when the fund shares are sold.

There are Mutual fund classes with different fee structures that can be aimed at both private and institutional investors.

A-shares can be contrasted with B-shares, which have a back-end sell load. Mutual Fund A shares should not be confused with A shares of common stock.

How Do A-Shares Work?

A-shares are a type of share class of mutual funds. These shares are targeted at individual retail investors. Other retail share classes in a multi-class mutual fund may include Class B or Class C. Investors can also find advisor shares and institutional shares.

The investments in mutual fund share classes are collectively pooled and managed by the fund’s portfolio manager. Each share class invests in the same fund strategy with the same portfolio manager. What distinguishes the share classes is primarily their fee structure. Share classes allow fund companies to target different types of investors, from individuals to advisors to institutional investors.

Class A shares are primarily intended for retail investors and are the most widely used share class in the mutual fund space. These funds may seem costly at first but become relatively cheaper in the long run because they have a front-load but no backload when selling.

  • When A-Shares Are Best: Long-term investors (5+ years and definitely 10+) will do best with A-share funds. While the initial charge may seem high, the running internal charges of A-share funds tend to be lower than those of B- and C-shares.
  • When B-Shares Are Best: If you believe that in about 5 to 7 years you will sell your shares and the back load amount is decreasing every year, B shares may be a good idea because you don’t pay any load up front and pay little or nothing when you sell. Just make sure that the expense ratio isn’t too high (hopefully not much higher than 1.00%). 
  • When C-Shares Are Best: This share class is usually the best idea if you are going to hold your mutual fund shares for a short period of time (more than a year but less than three). You don’t pay a frontload, but sometimes a backload is charged if you sell the fund within a year. The current level load of 1.00% becomes expensive over time, which is why these are best for one to three years.

A-Share Charges and Expenses

The rules of each class of shares for retail investors are determined by the mutual fund company. A key factor in the structuring of unit classes is the sales charge schedule developed for the distribution of the mutual fund among intermediaries.

The mutual fund companies set a distribution commission fee structure for each unit class shown in the fund prospectus. Each share class also has its own operating cost structure.

Distribution fees, also known as 12b-1 fees, are part of the running costs of the Fund but are paid to intermediaries. Distribution fees often differ between share classes and typically correlate with the sales charge schedule, requiring lower sales charges for share classes with higher sales charges.

Mutual fund companies can report individual net asset values ​​(NAVs) and performance for each share class. The returns of a share class are more affected by the sales charge, with less impact on the returns from distribution costs.

Class A Shares typically incur an initial charge which can be up to approximately 5.75% of an investment when transacted through a full-service brokerage. The expense ratios for share classes also vary between retail investor shares, which are typically higher than advisor or institutional shares.

Mutual fund companies will state their front-end load and expense ratios per unit class in the fund’s prospectus. Many mutual fund companies also offer share class returns in their marketing materials.

Example of an A Share

The Principal Equity Income Fund is an example. This fund offers A, C, and I shares (where the I shares are institutional). The one-year return for the A-share class with front-end load was 15.60% as of November 30, 2017.

This differs from the return of the C shares, which was 20.46% with a deferred issue surcharge. The expense ratios of the two share classes also vary. The A-share class has a total expense ratio of 0.91%. The C share class has a total expense ratio of 1.65%.

A management fee of 0.51% per year is charged for both A-shares and C-shares. However, the distribution and service fees differ between the two share classes for retail investors. The A-share class has a lower distribution fee of 0.25% compared to 1.00% for the C share class.

Let’s look at an example to clarify the concepts:

Roger invests $ 1,000 in A shares of a mutual fund. He buys A shares with a commission of 5%. With their front-end load structure, 5% of Roger’s $ 1,000 investment would be instantly deducted as commission. Only $ 950 of Roger’s money would be invested in mutual fund shares, but he would no longer owe the fund any commissions. If Roger’s investment grew 10%, he’d keep all of $ 1,045 if he sold his A-shares after a year.

Let’s say Roger decides to invest his $ 1,000 in B shares with a 5% commission; he would not pay any upfront commission. However, if he decides to sell his B shares after making a 10% profit, he will owe a commission of $ 1,100 x 5% = $ 55 on the sale of his shares and he will pocket the remaining $ 1,045.

If Roger buys $ 1,000 worth of C shares because they are level load stocks, the full $ 1,000 will be used to buy stocks. But regardless of the fund’s performance, Roger pays an annual commission fee to the fund.