What Is a Load?
Let me tell you directly: a load is a sales charge or commission you pay as an investor when you buy or redeem shares in a mutual fund. These charges are set by the mutual fund company and handled by intermediaries in the transactions. You'll encounter common types like front-end loads and back-end loads, and you can compare these to no-load mutual funds that skip the charges entirely.
Key Takeaways
Understand this: a load is the sales charge you pay to brokers or agents for selling you the fund. Front-end loads hit you at the time of purchase and might come with lower net expense ratios. Back-end loads apply when you sell your shares, but they can decrease to zero after holding for 10 years or more. No-load funds are a growing choice with no sales loads at either end, often sold directly by the fund company or its partners.
How Sales Loads Work
Here's how it operates: a load compensates an intermediary for distributing mutual fund shares. These vary by share class, as determined by the fund company, and you'll find the sales charge schedule in the fund's prospectus. Loads can be front-end, back-end, or level, and front-end or back-end ones are paid directly to intermediaries by you, not factored into the fund's net asset value (NAV).
Front-End Load
With front-end loads, typically linked to A-share classes, you pay this charge when you buy the fund, and it can go up to about 5.75%. You might choose this because it avoids ongoing fees, letting your capital grow without interruptions over time. A-shares often have lower expense ratios, which cover annual management and marketing fees. As your investment grows, front-end loads can be discounted, but remember, it means less of your initial money starts working for you, which matters more if your investment horizon is short.
Back-End Load
Back-end loads tie to B-shares or C-shares, and you pay them when selling the fund. For B-shares, it's often a contingent deferred load that drops over time, starting highest in the first year and possibly reaching zero after five to 10 years. Don't mix this up with redemption fees, which some funds charge to deter frequent trading that could disrupt the fund's goals.
Other Fund Expenses
Any payment to an intermediary for distribution counts as a load, and you also pay annual operating expenses reflected in the fund's NAV. Part of these might include a 12b-1 fee, or level-load, paid annually as a percentage of your share class assets. For instance, in something like the Principal Equity Income Fund, A-shares have a 5.50% front-end and 1.00% back-end, while C-shares skip the front-end but charge 1.00% back-end, both with varying 12b-1 fees. You might also face redemption fees on the back-end, charged if you sell too soon, say within 30 days to a year, to cover the fund's transaction costs from short-term trading—these aren't loads since they don't go to intermediaries.
Sales Load Considerations
These sales charges are agreements between fund companies and intermediaries, usually from full-service brokers or distributors. You can potentially skip them by trading through a discount brokerage platform or via a retirement plan. Most funds offer breakpoints, rights of accumulation, and letter of intent for discounts on larger investments, detailed in the prospectus.
No-Load Funds
If you go for a no-load fund, shares are sold without any commission or sales charge because the investment company distributes them directly, not through a third party. This is the flip side of load funds, whether front- or back-end, which charge at purchase or sale, or level-load ones that keep fees going as long as you hold the fund.
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