What it means
Mutual funds pool money from many investors and invest it in a portfolio of securities. Some are sold through advisers or brokers, and the load pays for that service, working like a commission.
The charge reduces the money actually invested, so the investor starts with less working for them. There are several types.
A front-end load is taken when you buy, a back-end load (also called a contingent deferred sales charge) is taken when you sell and usually falls the longer you hold, and a level load is a smaller charge built into the fund's yearly costs. The type of charge affects when the cost bites.
Loads are in addition to the fund's expense ratio, which is the yearly percentage of assets charged for management and administration. A fund may carry both, so comparing total cost over the holding period is the sensible approach.
A load looks small once, but the lost growth on that money compounds over years. Many funds offer breakpoints, which are discounts on the load as the investment gets larger, and some waive the charge for certain buyers.
Fund documents, including the prospectus, must disclose all fees, and regulators in many countries set maximum levels. An investor who can buy a similar fund with no load, through a fee-based adviser or a direct platform, should compare the options.
A load is not automatically bad, because the adviser's help may be worth paying for. The sensible test is whether the advice, the fund's performance and the overall cost justify the charge compared with the alternatives.
Ask for the all-in cost over five and ten years before agreeing.
In practice
Real-world examples.
Example
A retired teacher meets an adviser who recommends a balanced fund with a 5% front-end load. She invests $50,000 and $2,500 goes to the sales charge. She decides that the adviser's retirement planning is worth the cost. The adviser also reviews her plan each year, which she values.
Example
A young engineer opens an account on a low-cost online platform and picks a no-load index fund. All $5,000 goes into the fund. He pays only the small annual expense ratio. Over 20 years, the cost saving compounds in his favour.
Example
A small business owner buys a fund with a back-end load that starts at 5% and declines by 1% each year until it reaches zero. She sells after 3 years, when the charge is 2%. On a $30,000 sale, that is a $600 fee. Had she waited two more years, the fee would have disappeared.
Formula
Calculation
Net amount invested = Amount paid x (1 - Load %)
Offering price = Net asset value per share / (1 - Load %)
An investor puts $10,000 into a fund with a 4% front-end load. The charge is $10,000 x 0.04 = $400, so $10,000 - $400 = $9,600 is invested. If the fund's net asset value (NAV, the value of one share) is $24, the offering price is $24 / 0.96 = $25. The investor buys $10,000 / $25 = 400 shares, which are worth 400 x $24 = $9,600 at NAV. The investor must earn back that $400 before making any profit.Case study
Seen in the real world.
Meridian Wealth Partners is an illustrative, fictional advisory firm that sold funds with a 5.25% front-end load. A client, Mr Okafor, invested $200,000 and noticed that $10,500 went to the sales charge on day one.
His accountant compared the choices. A no-load fund with a similar strategy and slightly higher yearly running costs would leave him roughly $10,500 better off at the start, and over ten years the compounding on that sum would add noticeably more.
Mr Okafor asked Meridian whether the load could be reduced. The firm offered a lower charge because of the size of his investment, which is a breakpoint, and he accepted. The story is illustrative, but it shows why asking about fees is worthwhile. The firm kept the client, and he saved money.
Watch out
Common mistakes.
- Assuming a high load buys better performance, when research and experience show there is no guarantee of that.
- Forgetting that the load is paid in addition to the annual expense ratio.
- Ignoring breakpoints, which can cut the load substantially on larger purchases, or failing to combine accounts to reach them.
Questions
People also ask.
What is the difference between a load fund and a no-load fund?
A load fund charges a sales fee on purchase, sale or through ongoing charges, while a no-load fund does not charge a sales fee, though it may still charge management costs.
Is the load the same as the expense ratio?
No, the load is a sales charge on buying or selling, while the expense ratio is the yearly cost of running the fund.
Can a load be negotiated?
Sometimes, since breakpoints, waivers and adviser discretion may reduce it, so it is always worth asking before you buy.
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