Load Fund

A load fund is a fund that a sales intermediary charges to an investor when he purchases a mutual fund. This fund aims to cover the service cost of the sales intermediary like brokers, financial advisors, and investment planners.

The sales intermediaries charge this fund as compensation for providing their services to the investor. Their services include running the mutual fund and utilizing their expertise to choose the most suitable one for the investor. The fund structure information must be mentioned in the mutual fund’s offer documents. However, these funds may affect the overall returns received from the mutual funds.

• A load fund is a mutual fund type where an investor must pay a certain amount to a financial intermediary as a commission or sales charge. The sales charge is expressed as a percentage of the total investment amount.
• Financial intermediaries, like a broker, financial planners, or investment advisors, use their experience and expertise to select the most appropriate investment option for the investor. They make all the financial decisions on the client’s behalf.
• This fund type helps an investor make well-informed investment decisions to maximize his possibility of earning better returns.

A load fund is a fund the investor pays to a sales intermediary while investing in a mutual fund. It is expressed as a percentage of the total amount the investor spends purchasing or selling a mutual fund. This is a commission or a sales charge that a financial intermediary receives for investing their time, efforts, and skills in providing their services to the investor. These services include selecting the most appropriate mutual fund for the investors and running the mutual fund. The sales intermediaries include financial-planner, investment advisors, and brokers.

A front-end load fund, or the entry load, is the amount an investor pays during the initial mutual fund’s purchase. This amount is included in the mutual fund’s cost. Since the front-end load fund is deducted from the mutual fund’s price, it reduces the overall value of the mutual fund. For example, if an investor invests in a mutual fund that costs $10,000 and the entry load is charged at 5%, his actual investment amount in the mutual fund will be $9,500, and $500 will be deducted as commission and sales charge.

A back-end load fund, or exit load, is the amount an investor pays when he sells his mutual fund. The commission is charged as the share value’s sales amount. The exit load is not considered a part of the scheme’s earnings. For example, if an investor receives $10,000 from his total investments and the back-end load fund rate is 1%, then the investor’s final earnings will be $9,900, and $100 will be deducted as commission and sales charge.

The various types of funds are as follows:

#1 - Class A Shares

These share classes consist of entry loads an investor pays upfront on the total amount he invests to purchase the mutual fund. This level load is a charge against the services the brokers and financial advisors provide for choosing the most suitable fund for the investor to invest in. Investors can reduce the sales charge through the breakout discounts that investing in class A shares offers. This is the lowest-cost alternative and is appropriate for investors investing a significant amount in mutual funds. The charge for this share class is usually between 5% to 8%.

#2 - Class B Shares

This share class consists of exit loads an investor must pay when selling the mutual funds. The sales period is predetermined and usually ranges between five to eight years. Additionally, investors must pay a redemption fee in this share class. The redemption amount can be up to 6%. This share class does not offer any breakout discount. However, the back-end charge decreases over the investment period.

Additionally, an investor can exchange the Class B shares for Class A shares after holding this share class for seven to eight years. It is suitable for investors who lack the capital to invest in Class A shares but plan to convert their Class B shares into Class A shares after the stipulated holding period as they qualify for breakout discounts.

#3 - Class C Shares

This share class charges a 1% level load throughout the investment period. It does not offer any breakout discount. However, this share class is the most expensive and appropriate for investors looking for short-term investments.

Let us understand this concept with the following examples:

Example #1

Suppose Gary wants to invest in a mutual fund. He approaches Rose, his financial advisor, who chooses the most suitable mutual fund for Gary to invest in. Rose charges an entry load of 5% on the investment amount. Gary invests $100,000 in the mutual fund, of which $5,000 is the deduction for Rose’s sales charge. The actual investment amount on the mutual fund is $95,000. This is an example of a load fund.

Example #2

On June 5, 2021, SBI Mutual Funds announced they would reduce the exit load period and percentage on several mutual funds. It introduced the reductions on June 7, 2021. The decrease in exit load percentage and period would benefit many investment schemes, including the SIPs (Systematic Investment Plans) and other similar investment options. This is an example of a load fund.

The advantages of a load fund are as follows:

• Investors prefer paying this fund in exchange for the financial intermediary’s services. This ensures that the broker or the investment advisor conducts extensive research before selecting the most suitable fund for the investor. Additionally, they make well-informed financial decisions on the client’s behalf.
• One of the advantages of a load fund is that it saves investors from making wrong decisions which could lead them to incur losses. Furthermore, they can earn better returns by paying a nominal percentage as a sales charge.

The differences are as follows:

• Load Fund: This is a mutual fund type where the investor must pay a commission and sales charge to an intermediary like a financial broker, financial planner, or investment advisor. The financial intermediary researches and chooses the most suitable investment option for their clients. The intermediary makes the financial decisions on the investor’s behalf. However, they charge a percentage of the total investment amount as the sales charge.
• No-Load Fund: This fund is a mutual fund type where the investors do not require to pay any sales charge or commission. The investors conduct their research and make financial decisions on their own. Usually, the investors purchase the mutual funds directly from the investment company. Intermediaries do not offer their services in this fund.

This article has been a guide to what is Load Fund. Here, we explain the topic in detail with its comparison with no-load fund, examples, advantages, and types. You may also find some useful articles here -

• No-Load Mutual Fund
• Types of Mutual Funds
• Fixed Income Funds