Load Fund

Load Fund

What is a loading fund?

A load fund is a mutual fund that comes with sales charges or a commission. The fund investor pays the charge, which will compensate a sales intermediary, such as a broker, a financial planner or an investment advisor, for his time and expertise in selecting an appropriate fund for the investor. . The charge is paid in advance at the time of purchase (initial charge), when the shares are sold (main charge), or as long as the fund is held by the investor (charge level).

Load funds can be compared to no-load funds, which have no sales charge.

Key points to remember

  • A loading fund includes shares in UCIs which include a sales commission paid by the buyer of the fund.
  • Charges can be paid at the time of purchase (initial load) or at the time of sale (deferred load), and are often paid to a broker or agent who sold the fund.
  • How the charge will be paid will vary depending on the class of mutual fund shares involved.

The basics of load funds

If a fund limits its level load to no more than 0.25% (the maximum is 1%), it may be called a “no charge” fund in its marketing materials. Entry and exit charges are not part of the operating costs of a mutual fund and are generally paid to the selling broker and the broker as a commission. However, the level charges, called charges 12b-1, are included in operating charges.

Funds that do not charge a fee are called no-load funds, which are generally sold directly by the mutual fund company or through their partners.

Comparison of charges for different categories of fund shares

In the 1970s, mutual fund companies were criticized for the high sales charges they charged as well as the excessive fees and other hidden charges. As a result, they introduced several share classes offering investors several options for paying the sales charge.

Class A shares: Class A shares are traditional front-end funds which charge an initial sales charge on the amount invested. Most Class A funds offer breakpoint discounts that reduce the cost of sales for purchases at higher thresholds. For investors with larger amounts of money to invest over a long period of time, Class A shares may be the cheapest option because of the breakpoint discounts.

Class B shares: Class B shares include a basic charge or conditional deferred sales charges (CDSC), which are deducted when the shares are sold. Class B equity funds do not offer breakpoint discounts, although the CDSC decreases over a period of five to eight years. At this point, the shares are converted into Class A shares with no main charge. Some Class B equity funds also charge an annual 12b-1 fee, which can increase investment costs over time. When Class B shares are converted to Class A shares, the 12b-1 fee disappears. Class B shares with a low expense ratio may be a better option when smaller investments are made with a long holding period.

Class C shares: Class C share funds also charge a CDSC, but it is generally lower than Class B shares. Class C shares are more dependent on 12b-1 fees, which tend to be higher than class B actions, and they can last indefinitely. Class C equity funds do not offer any discounts on breakpoints. Due to the higher 12b-1 fees, Class C shares may be the most expensive option in the long term.

Benefits of Load Funds

Investors can automatically assume that load funds are the best choice over no-load funds, but this may not be the case. Load fund charges are paid to the investor or fund manager who researches and makes investment decisions on behalf of the client. These experts can sort through mutual funds and help investors make smart investment decisions that they may not have the skills or knowledge to make on their own. Paying upfront fees can also eliminate the need to undermine investment returns by paying ongoing expense fees out of the returns the fund achieves.

The main drawback, of course, is the charge itself. No-load mutual funds are now available as no-load options.

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