What is a C-share mutual fund?
A C-share mutual fund is a class of fund with continuous sales charges instead of high upfront or back-end fees. Like B-shares, those sales charges result in a very high expense ratio. Unlike B-shares, those extra fees never end. Some C-shares also charge a front-end commission, but well below that of A-shares. Many C-shares also charge a back-end fee when shares are liquidated, but well below the back-end penalties B-shares can incur.
For years, reps found front-end loaded A-shares and back-end loaded B-shares hard to sell because of the obvious damage of the high fees. C-shares reduce the magnitude of those one-time charges while still allowing for the payment of commissions to the broker.
Why you should avoid C-share mutual funds
Continuous sales charges
Like other mutual funds, C-share funds incur management and administrative expenses. Continuous sales fees are added to these, resulting in high expense ratios, often 2% or more. This greatly damages potential growth, sometimes wiping out the entire yield of bonds and trimming average stock returns by 20-40%.
Transaction fees
The fees charged for purchasing and selling C-shares bleed assets upon every transaction. Though not as severe as the front and back-end charges of A- and B-shares, these fees create reticence to move money, making them harmful both in their direct cost and retardant impact on executing your desired strategy.
Never-ending commissions
C-share funds are often promoted as a low-cost alternative to A- and B-shares. In the long run, C-shares are the most destructive. The front-end load of A-shares hits only once. The annual sales fees tacked onto B-shares end after several years. C-share fees never end. Sometime between five and eight years C-share costs pass those of the other classes. A C-share fund tracking the S&P 500 with a 0.2% management fee and 1% annual sales commission from 1998 through 2017 would have grown a $50,000 investment to $157,429 (Figure 27-1). A no-load fund in the same stocks would have reached $190,613. This $33,184 forfeiture vastly exceeds the damage of both A- and B-shares.
What you should do instead
If you own or are considering a C-share fund for a specific exposure, find a low-cost no-load fund with similar focus. If the relevant C-share fund is your main investment, click here for a proper investment regimen. If you do not have free access to low cost no-load index funds at your institution, switch institutions.
* Data sources:
Stock returns: S&P Dow Jones Indices LLC; Standard & Poor’s 500 Index.
Bond returns: Federal Reserve Release H-15; An index of equal parts (25% each) Moody’s Aaa corporate bonds, Moody’s Baa corporate bonds, 5-year Treasury bonds, and 10-year Treasury bonds, rebalanced annually.
Fund expense rate: 0.2%. Loaded C-share sales charge: 1% annually.