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Load Fund

A mutual fund that carries a commission to purchase or sell its shares

What is a Load Fund?

A load fund is a mutual fund that carries a commission to purchase or sell its shares. The load is calculated as a percentage of the amount that an investor purchases or sells. The investor pays the load, which is used to compensate a broker or investment advisor for their time and skill in selecting an appropriate fund.

 

Load Fund

 

When a load is paid at the time of purchase, it is referred to as a front-end load. A load that is paid when the shares are sold is referred to as a back-end load or a contingent deferred sales charge. A mutual fund can charge between 4% to 8% on the investment amount, or a flat fee depending on the initial agreement with the mutual fund provider.

 

Load Fund vs. No-load Fund

The reason why most investors go for load funds, as opposed to no-load funds, is to compensate the financial intermediary who did the research, recommended, and sold the fund to them. The financial intermediaries such as brokers and financial planners use their time and expertise to get the best possible fund for their client.

In exchange for their skill, the intermediary is paid a commission that is a percentage of the total amount of the investment. If an investor possesses the expertise of researching the best investment and making independent decisions on the sale or purchase of mutual fund, then the investor achieves no benefit in buying load funds from a financial intermediary.

Most investors prefer no-load funds since the option minimizes expenses and translates to higher returns. A no-load fund is a fund that does not charge a load and is sold directly by the mutual fund company. No-load funds can be redeemed after a certain duration of time without a sales charge, as is the case with load funds.

The expenses incurred in managing the no-load funds are deducted from the gross returns of the fund. For example, if a fund returns 10% before fees and expenses, and the total expenses and expenses amount to 1%, the investor will earn a net return of 9%. No-load funds do not charge sales loads but may charge other types of fees such as exchange fees, redemption fees, and account maintenance fees.

Types of Load Fund Share Classes

Mutual fund companies own multiple shares classes that give investors several options of paying the sales charges. Each share class comes with its own advantages and disadvantages, which center around the expenses that investors incur:

 

1. Class A shares

Class A shares are front-end load funds that carry an upfront sales charge on the total amount of the investment. The charge is used to pay for the services of an investment advisor and ranges from 5% to 8%. Investors who want to invest large amounts of money into the fund can benefit from breakout discounts that reduce the sales charge on the invested amount.

Class A shares offer the lowest cost option to investors who plan to invest large dollar amounts over a long period of time. For example, if an investor invests $100,000 in a mutual fund with a load of 5%, the investor will incur a sales charge of $5,000 and remain with a net of $95,000.

 

2. Class B shares

Class B shares do not carry a front-end sales charge, and instead charge a back-end load if the investor sells his/her investment before the agreed period, usually five to eight years. In addition, the investor will incur a redemption fee of up to 6%. Unlike class A shares that offer breakout discounts for large investments, class B shares do not offer breakout shares, but the back-end charge decreases over the investment timeframe.

Eventually, after seven or eight years holding period, the investor can exchange the class B shares into class A shares. Class B shares are appropriate for investors who lack adequate capital to invest in class A and qualify for breakout discounts but can hold class B shares for about seven years before exchanging them into class A shares.

 

3. Class C shares

Class C shares charge a level load of about 1% all through the investment holding period, making it the most expensive share class for investors who plan to hold the investment in the long term. They do not offer breakout discounts. Class C shares are most appropriate for investors who plan to hold the shares in the short term, which is usually less than three years.

 

Advantages of Load Funds

Although load funds charge a commission, they are still preferred by some investors over no-load funds. Investors pay a commission to the financial intermediary that conducts research on the most appropriate mutual fund to invest in and goes ahead to make an investment decision on behalf of the client.

Using a financial intermediary protects inexperienced investors from making wrong choices due to a lack of knowledge to conduct research and make decisions on their own. Using an expert broker can help the investor realize better returns, by only incurring a small commission to compensate the broker for their skill.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Investing: A Beginner’s Guide
  • Rate of Return
  • Service Charge
  • Trading Mechanisms

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