What is a Load Fund?
A load fund is a mutual fund that comes with a sales charge or commission. The fund investor pays the load, which goes to compensate a sales intermediary, such as a broker, financial planner, or investment advisor, for his time and expertise in selecting an appropriate fund for the investor.
The load is either paid upfront at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load). Load funds may be contrasted with no-load funds, which do not carry a sales charge.
How does load fund work?
A load fee is generally charged as a percentage of total investment. This method stays the same for both front load and back end load. The front-load mutual fund charges for investing while the back-end mutual fund charges for selling the mutual fund. The load charges vary for different AMCs.
For example, if an investor is aiming to invest Rs. 1,00,000 in a mutual fund scheme with a front-end load of 5%. The front-end load in this case would be Rs. 5,000. This charge is deducted from the initial investment amount and only Rs. 95,000 is invested.
In the case of a back-end fund scheme with a load of 5% and the initial investment amount of Rs. 1,00,000, the investor will have to pay Rs. 5,000 at the time of redemption. In both cases, it is necessary to get returns higher than the load fees charged.
Visibly, the size of the investment affects the load charges. But, few mutual fund houses even charge flat fees instead of percentages as load.
What you need to know about load funds
If the no load funds do not require commission, then why do so many investors choose investing in load funds?
The answer is expertise. Investors go for load funds to compensate their financial intermediary for undertaking research, recommending and selling the fund identified as the best possible option for the particular investor.
If you are a professional, capable of researching and making independent investment decisions on purchase and sale of mutual funds, the intermediary’s help can be optional. Some investors go for no-load funds to minimise expenses.
However, if you do not specialise in mutual funds trading, payments for experts’ research and investment decisions on your behalf can serve for your benefit. Load fund managers can help you take smart investment decisions, choosing the appropriate mutual fund to invest in.
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 invest large amounts of money can benefit from breakout discounts that reduce the sales charge.
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. They, instead, charge a back-end load if the investor sells his/her investment before an 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. However, the back-end charge decreases over the investment timeframe.
Eventually, after a seven or eight year holding period, the investor can exchange the class B shares for 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 for 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 for the short term.
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 makes 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. Using an expert can help the investor realize better returns by only incurring a small commission.