Class C Shares

After the stated holding period, Marchetti Fund automatically converts Ottilie Class C shares into Class A shares of the same portfolio, which carry a lower annual 12b-1 fee. The tax consequence to Ottilie is:

1. A.a taxable exchange, with the Class A shares taking a new basis equal to their value at conversion.That describes an exchange between different funds, not a conversion within one fund.
2. B.a taxable event only if the conversion happens in a taxable account rather than an IRA.It is not a taxable event in either account type; the account merely changes who would care.
3. C.the entire unrealised gain becomes taxable in the year of conversion.Nothing is realised, because she has not disposed of her interest in the fund.
4. D.none; no gain or loss is recognised and her basis and holding period carry over.Correct. A same-fund share class conversion is not a taxable disposition.

Why: A conversion from one share class into another class of the same fund is not treated as a sale for tax purposes. Ottilie recognises no gain or loss, her cost basis and holding period carry over to the Class A shares, and the only change is a lower ongoing expense. The conversion is what makes the Class C structure tolerable over long periods, since it eventually stops the higher asset-based charge.

Class C mutual fund shares typically have:

1. A.The highest front-end sales chargeThe heaviest front-end charge belongs to Class A. Class C is built the other way around, taking little or nothing at purchase and recovering the cost through a higher annual fee, which is why it suits a shorter holding period than A does.
2. B.A level load with higher ongoing 12b-1 feesCorrect - level-load C shares.
3. C.No fees at allThe absence of a visible deduction at purchase creates this impression, and it is why C shares are sometimes described to clients as free. The cost is simply annual rather than upfront: the elevated 12b-1 fee never steps down, so over a long holding period C shares can cost more than A shares would have.
4. D.A guaranteed returnShare classes divide up the cost of distribution; none of them alters what the portfolio earns. Every class of the fund owns the same securities and rises and falls with them, so no class carries a guarantee.

Why: Class C shares carry a level load (higher ongoing 12b-1 fees) with little or no front-end charge, best for shorter holding periods.

Thaddeus notices that Class A and Class C shares of the Ellsworth Growth Fund are listed at different net asset values, even though the prospectus says both classes represent an interest in the same portfolio. The explanation is that:

1. A.Class A shares include the front-end sales charge in the quoted net asset valueNAV never includes a sales charge. The load appears in the public offering price, not in the NAV.
2. B.the two classes hold different securities selected for different investor typesAll classes of one fund own an undivided interest in a single portfolio. Only the expense structure differs.
3. C.each class bears its own distribution expenses, so the class with higher ongoing fees develops a lower net asset valueCorrect. Class-specific expenses are charged to that class alone, which separates the NAVs over time.
4. D.the classes are valued on different days, so the quotes are not comparableAll classes are valued at the same time each business day using the same portfolio prices.

Why: Multiple share classes of one fund own the same portfolio, but each class bears its own distribution and service expenses. Class C's higher ongoing 12b-1 fee is charged against Class C assets only, so Class C's net assets per share grow more slowly and its NAV drifts below Class A's over time. The portfolio is identical; the expense load is not. This is also why long-horizon investors usually do better in Class A despite the front-end load. The clue is the phrase same portfolio. Review: how multiple share classes work.

Casimir invests 20,000 dollars in Class C shares of a fund that imposes a 1% contingent deferred sales charge on shares redeemed within twelve months of purchase, applied to the lesser of original cost or current value. He redeems the entire position nine months later, when it is worth 21,500 dollars. What does he receive?

1. A.21,300 dollars, after a 200 dollar charge.Correct. 1% of the 20,000 dollar cost is 200 dollars.
2. B.21,500 dollars, because Class C shares never carry a deferred sales charge.Class C shares commonly carry a small deferred charge in the first year.
3. C.21,285 dollars, after a 215 dollar charge.This applies the rate to the current value of 21,500 dollars, which the stated schedule does not do.
4. D.20,000 dollars, because the deferred charge captures the entire gain.The charge is one percent, not a forfeiture of the appreciation.

Why: Because the schedule applies the charge to the lesser of original cost or current value, the base is his 20,000 dollar cost rather than the 21,500 dollar current value. The charge is 1% of 20,000 dollars, or 200 dollars, leaving him 21,300 dollars. Applying the rate to the appreciated value would penalise him for the gain, which is precisely why fund schedules are written this way.