Load or No Load

When buying mutual funds you want to consider load or no load funds. A  load is a sales charge or commission that is charged to an investor whenever they buy or redeem shares in a mutual fund. There are three types of loads – front-end load, back-end loads, and annual basis, such as a 12b-1 fee.

The front-end load is a fee charged when the investor buys a fund. Class-A shares charge a front-end load, which is taken from an investor’s initial investment.

The back-end load is when the investor redeems the mutual fund shares. The back-end load is a type of sales charge that is used with mutual funds that have share classes, identified as Class-B shares.

The 12b-1 is charged as an annual percentage based on the current value of the investment on an annual basis. Thus, investors avoid paying a front-end or back-end load when purchasing or redeeming the fund. The 12b-1 fee is restricted by the government to 1% of the current value of the investment on an annual basis, but they generally fall somewhere between 0.25-1%. The fee must be voted on by the mutual fund’s directors, and must be disclosed in the mutual fund prospectus. Since this fee is a little less obvious (not an upfront charge like the 12b-1 fee), investors should read mutual fund documentation thoroughly to understand the fees they are paying.

Class-C shares are considered to be a type of level-load fund – no front-end and low back-end loads, but the fund’s operating expenses are high. In all cases, the load is paid to a financial intermediary, and is not included in a fund’s operating expenses.

A no-load  is a mutual fund wherein shares are sold without a commission or sales charge. The  shares are distributed directly by the investment company, instead of going through a secondary party. This is the opposite of a load fund, which charges a commission at the time of the fund’s purchase, at the time of its sale, or as a “level-load” for as long as the investor holds the fund.

Since there isn’t a transaction cost to purchase a no-load fund, all of the money invested is working for the investor. Let’s say you purchase $10,000 worth of a no-load mutual fund. All $10,000 will be invested into the fund. On the other hand, if you were to buy a load fund that charges a front-end load (sales commission) of 5%, you actually invested only $9,500 in the fund. If the load is back-ended, when shares of the fund are sold, the $500 sales commission comes out of the proceeds. If the level-load (12b-1 fee) is 1%, your fund balance will be charged $100 annually for as long as you own the fund.

The main justification for a load fund is that the investors are compensating a sales intermediary (broker, financial planner, investment advisor, etc.) for his/her time and expertise in selecting an appropriate fund. However, research has shown that load funds don’t outperform no-load funds.



More Posts

Safeguarding Seniors

Safeguarding Seniors

In a world where financial exploitation of seniors is increasingly prevalent, empowering this vulnerable group with

Poverty on the rise

Poverty on the rise

As the United States continues to deal with the repercussions of the COVID-19 pandemic, many individuals

Send Us A Message