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.

 

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