Reviewed by Sep 30, 2020| Updated on
The method of modifying a class of mutual funds is most commonly known as reclassification. This may arise when certain criteria have been met or may be triggered by adjustments from the mutual fund company. The reclassification is not considered a taxable occurrence in most situations.
Reclassification may be used in the structuring of open-end mutual funds. This gives some versatility for the management of share class features to a mutual fund. It can also bring advantages to investors.
The fund usually issues multiple classes of shares in open-end mutual funds. Each share class is organised with its own charges and loads of sales. Some mutual fund companies may structure certain shares based on their duration, with reclassification provisions.
Some funds can decide, at their discretion, to restructure share classes. This can happen when the fund is affected by organisational changes. The redistribution of share classes can also be the result of demand. A certain class of share may have low demand, which allows the fund business to combine with another class of share. A business may create a new reclassification share class that meets demands from certain types of customers.
Companies can reclassify paid dividends that may affect the taxes of an investor. Because of low demand or performance, a fund company may choose to merge a fund. This type of reclassification, when merged with the new fund, can create a taxable event for the investor based on the share conversion price.
Funds within a fund family may be reclassified due to exchange privileges. Exchange privileges allow investors to easily exchange share classes within a fund. They may also exchange shares to a new fund within the investment company's fund offerings.