What Is a Load Fund?
A load fund is a mutual fund that comes with a sales charge or commission. The investor pays this load to compensate a sales intermediary, such as a broker, financial planner, or investment advisor, for their time and expertise in selecting an appropriate fund. The load can be paid upfront at purchase (front-end load), at the time of sale (back-end load), or continually while the fund is held by the investor (level-load). Load funds stand in contrast to no-load funds, which do not carry any sales charge.
Key Takeaways
- A load fund involves mutual fund shares that have a sales commission paid by the purchaser.
- Loads can be paid at purchase (front-end load) or sale (back-end load), and are often given to the broker or agent who sold the fund.
- The payment method of the load depends on the mutual fund share class involved.
Mastering Load Funds for Smart Investments
If a fund limits its level load to no more than 0.25% (with a maximum of 1%), it can market itself as a “no-load” fund. Front-end and back-end loads are not considered operating expenses for mutual funds and are generally paid to the selling broker as a commission. However, level-loads, referred to as 12b-1 fees, are included as operating expenses. No-load funds, typically offered directly by mutual fund companies or through their partners, do not charge a load.
Investors might intuitively prefer no-load funds over load funds, but considerations may vary. Fees from load funds compensate experts who conduct research and make investment decisions on the investor’s behalf, enhancing fund selection. Paying an upfront fee can also avoid continuous expense fees sapping returns over time.
The disadvantage, however, lies in the load itself. As financial landscapes evolved, mutual fund companies faced criticism in the 1970s for high front-end sales loads and excessive fees, leading to the birth of multiple share classes offering diverse sales charge options.
- Class A Shares: Class A shares impose an upfront sales charge on the amount invested and often provide breakpoint discounts, reducing sales charges for larger purchases. For long-term, substantial investments, Class A shares might prove cost-effective due to these discounts.
- Class B Shares: Class B shares feature a back-end load, or contingent deferred sales charge (CDSC), deducted upon selling the shares. They don’t offer breakpoint discounts, although the CDSC diminishes over five to eight years, eventually converting to Class A shares with no back-end load. Some Class B shares also impose annual 12b-1 fees, augmenting long-term costs. Nevertheless, Class B shares might suit smaller, long-term investments if the expense ratio is low.
- Class C Shares: Class C shares also carry a CDSC, generally lower than Class B shares’, and mainly rely on higher 12b-1 fees. Lacking breakpoint discounts, Class C shares can be more costly over prolonged periods due to these perpetual fees, emerging as the most expensive route for extensive investments.
Related Terms: No-load Fund, Class A Shares, Class B Shares, Class C Shares, Mutual Fund Operating Expenses, 12b-1 Fees, Breakpoint Discounts.
