Share Class

A share class is different category of shares issued with each category having different characteristics, rights, and costs.
Share Class
3 min
09-May-2024

Share class encompasses various categories of shares issued by a business, each endowed with distinct rights and advantages. It's crucial for investors to understand share classes as they directly affect their ownership stake and level of influence within a company.

Investing in companies offers numerous avenues, with mutual funds emerging as a popular choice for wealth accumulation in recent years. It's crucial to understand that companies categorise their shares into different classes, each carrying unique privileges such as shareholder, capital, and voting rights, along with dividend entitlements, tailored to the company's requirements.

As an investor, it's essential to pay attention to the type of share class you're buying, as it dictates your rights within the company. In this article, we'll explore the concepts and types of shared classes in detail.

What is a Share Class?

A share class refers to a specific category of investment, whether it's common stock in a company or units of a mutual fund. Companies often issue multiple classes of stock, such as "Class A" and "Class B," each with its own set of rights and privileges. Similarly, mutual funds offer different share classes, each with varying sales charges, expense ratios, and minimum initial investment requirements. It's essential for investors to understand the distinctions between share classes to make informed investment decisions.

Company Share Class with Example?

Within the same entity, different share classes often grant varying rights to shareholders. For instance, a public company might offer two classes of common share class: Class A and Class B. This dual-class setup is typically established during the company's initial public offering (IPO). For example, when a private company goes public, it might issue Class A shares to new investors while granting existing stakeholders Class B shares. This structure allows original owners to sell most of their stake while retaining control through Class B shares, which usually carry extra voting rights. An illustration of this is Google's transition to Alphabet Inc. in 2015, where it introduced Class A shares (GOOGL) and Class C shares (GOOG), with only Class A shares having voting rights. Additionally, a Class B share was reserved for management and controlling parties.

Understanding the implications of different share classes is essential for investors, much like utilising tools such as SIP calculators for systematic investments and lumpsum calculators for one-time investments, to make informed financial decisions.

Mutual Funds Share Class with Example

Mutual funds commonly provide investors with various share classes, each with distinct fee structures that impact their performance. Despite sharing the same investment goals and portfolio, these classes differ in their fee arrangements and expense ratios.

The A share class typically involves a front-end load, which is a fee paid upfront at the time of purchase. This fee can range from 2% to 5.75% of the investment amount. Although A shares may seem expensive initially, they might become more cost-effective over the long term.

In contrast, the B share class operates with a back-end load, where investors pay a commission when they sell their shares. This fee gradually decreases the longer the investor holds onto the mutual fund, eventually reaching zero. Additionally, B shares often offer the option to convert into A shares after a specified period, typically around seven years.

The C share class imposes an annual fee, known as a level-load, which typically amounts to about 1% of the investment. However, C shares may also have a contingent deferred sales charge if sold within the first year of purchase.

Both B and C share classes tend to have higher expense ratios compared to A shares, reflecting the annual management and maintenance fees charged by the fund.

Institutional share class with Example

Mutual funds offer various share classes beyond A, B, and C, denoted by labels such as I, R, N, X, and Y, often termed as institutional shares. Typically, these classes are reserved for high-net-worth individuals, usually those with assets exceeding Rs. 1 crore, or institutional investors capable of making substantial deposits, often in the seven-figure range.

Interestingly, certain retirement plans like EPF (Employee Provident Fund) qualify as institutional investors. By consolidating employees' contributions, the plan administrator meets the criteria for assessing institutional shares. This is advantageous because institutional shares typically boast the lowest fees and expenses among mutual fund share classes. Consequently, they tend to yield superior returns due to their low expense ratios.

For instance, let's consider an Indian investment company like X Mutual Fund, which offers three share classes. Regular shares require initial deposits ranging from Rs. 5,000 to Rs. 10,000, with an average expense ratio of 1.5%. Direct shares necessitate minimums of Rs. 25,000 to Rs. 50,000, with an average expense ratio of 0.75%. Finally, Institutional shares commence at Rs. 1 crore, featuring an average expense ratio of 0.25%.

Conclusion

In conclusion, choosing the right share class is essential for optimising your investment strategy and achieving your financial goals. By carefully considering factors such as fees, expenses, minimum investments, and shareholder rights, investors can make informed decisions tailored to their needs. Additionally, seeking guidance from a financial advisor can provide valuable insights into selecting the most suitable share class. Furthermore, accessing a diverse range of mutual funds listed on platforms like Bajaj Finserv Mutual Fund Platform can offer investors a wider array of options to explore and diversify their portfolios effectively. With over 1000 mutual fund schemes available, investors can access various share classes and investment opportunities to build a robust and balanced investment portfolio.

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Disclaimer: Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Frequently asked questions

What do you mean by share class?
A share class refers to a specific category or type of shares within a company or a mutual fund. Each share class typically represents a different set of rights, privileges, fees, and expenses for investors.
What is Class A shares and Class B shares?

Class A shares and Class B shares are different categories of shares typically issued by companies or mutual funds:

  • Class A shares: These shares often come with front-end sales charges or loads, which means investors pay a fee when they purchase the shares. Class A shares generally have lower annual expenses compared to other share classes but may require a higher initial investment.
  • Class B shares: These shares usually do not have upfront sales charges but may come with back-end sales charges or loads, meaning investors pay a fee when they sell the shares. Class B shares often have higher annual expenses compared to Class A shares but may have lower initial investment requirements. They may also be convertible to Class A shares after a certain period.

What are Class 4 shares?
Class 4 shares typically refer to a specific category of shares within a company or mutual fund. However, it's important to note that the designation of Class 4 shares may vary depending on the organisation or fund. In general, Class 4 shares may represent a particular set of rights, privileges, fees, and expenses for investors, similar to other share classes. Investors should refer to the specific documentation provided by the company or mutual fund to understand the characteristics and features of Class 4 shares in detail.
How do I choose a share class?
To choose a share class, first, define your investment goals and assess your risk tolerance. Then, compare fees and expenses across different share classes, ensuring they align with your budget. Consider the minimum initial investment required and review shareholder rights, such as voting privileges and dividend entitlements. Seek advice from a financial advisor if needed and analyse the historical performance of share classes to gauge their potential returns. By considering these factors, you can select the share class that best matches your investment objectives and preferences.
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