What are Load Funds?

Mutual Funds are a great way for investors to ensure systematic returns and reduce their risk profile. However, as the mutual funds may be load funds or no-load funds, investors have to choose between the two as per their financial goals. Both types come with their advantages and disadvantages. Therefore, it is vital for investors to understand their structure in detail.

What are Mutual Funds?

A mutual fund is a pool of investments by different investors who share a common objective. It is managed by a fund manager who then invests these collective funds in different securities and shares in the market. The Manager invests the funds in an attempt to grow and appreciate the money over time. The income/gains from the investment are divided proportionately among the investors after deducting the applicable charges. In other words, a mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities following objectives as disclosed in the offer document.

What are Load Funds?

Load Funds are a type of mutual fund that comes with a commission or sales charge levied on investors who purchase the units of the mutual fund. Under load funds, the investors pay the load, which the mutual fund house uses to compensate the sales intermediary, such as the broker, for their time and efforts to choose the appropriate mutual fund. When the investors pay the load at the time of the purchase of mutual fund units, the payment is called the front-end load. On the other hand, when the load is paid at the time of sale of load funds, it is referred to as back-end load.

In contrast with load funds, there are no-load funds that do not come with a sales charge, and the investors do not have to pay a fee either at the time of purchase or sale of the load fund. The load fee often called a level load, is charged annually to the investors who invest in a load fund. The load is calculated and charged as the percentage of the mutual fund holding. The higher the investment amount in the load fund, the higher the level of load charged.

Understanding Load Funds

When investing in mutual funds, the investors have two options: Invest in load funds that come with a level load or invest in a no-load mutual fund that does not charge a level load. Mutual funds that come with a load fee levy a certain charge for the distribution and marketing expenses to be paid to the selling broker or the dealer-broker as commission. The fee in load funds is necessary to compensate the brokers who do extensive research in comparing various mutual funds and finding the best one suited for the investors.

Load Funds Vs No-Load Funds

Load Funds are different from no-load funds as the brokers who recommend load funds do extensive research before investing advising investors. Although load funds can be expensive for investors compared to no-load funds, investors still choose load funds over no-load funds because of the use of the levied commission towards research and recommendations absent in a no-load fund. Only those investors who have extensive financial knowledge and can analyse various mutual funds choose no-load funds as they can do the research personally.

The maxim limit for a mutual fund to charge a load in load funds is 1% of the total investment amount of an investor. However, if a mutual fund keeps its level load below 0.25%, it can call itself a no-load fund.

Types of Load Fund Share Classes

As companies can issue multiple shares classes to differentiate between the rights and benefits of shareholders, mutual fund companies also invest in multiple share classes which provide investors with different options of paying the sales charge or level load. Here are the types of load fund share classes:

• Class A shares: This type of load fund share class are front-end load funds that charge the investors upfront on the total invested amount. The level load is used to compensate the brokers/investment advisors for the services rendered to research the most suitable fund for the investors. Investors can reduce the sales charge based on breakout discounts when investing in Class A shares. They are the lowest cost option available to investors who plan to invest a large sum of money.
• Class B shares: They are back-end load funds and charge the level load at the time of the sale of the unit funds before an agreed period which is generally five to eight years. Furthermore, the investors are also liable to pay a redemption fee of up to 6% if the load fund has Class B shares. Unlike Class A shares, where the investors can avail of breakout discounts, Class B shares do not offer breakout discounts.
• Class C shares: Class C shares are the most expensive lot in the type of load fund share classes as the level load is about 1%. These types of shares are ideal for investors who want to hold the fund units for the short term. Furthermore, Class C shares do not offer breakout discounts.

Final Word

Loads Funds are an ideal investment for investors who want to earn good returns based on the research of investment advisors. Although they may seem more expensive than no-load funds, load funds provide better returns when the investor holds the fund units for the term.