What Is Level Load
Level load is an annual charge deducted from an investor's mutual fund assets to pay for distribution and marketing costs for as long as the investor holds the fund. For the most part, this fee goes to intermediaries who sell a fund's shares to the retail public. The level load will reduce the bottom line profit margin from an investment.
A level load is also known as a "12b-1 fee." The fee is an expense the investor pays for holding this particular type of security. All loads, including front-end and back-end loads, are a type of sales charge imposed onto the purchase of a mutual fund.
- Loads are separated from a fund's expense charges and are an additional charge for owning the security.
- Another difference between the level load and other loads is in the calculation of a fund's expense ratio.
- Fees cover the cost of running the mutual fund and include advisory costs, marketing, distribution and advertising.
How Level Loads Are Applied
Fund loading is a fee or service charge assessed on a mutual fund holding. There are three primary ways an investor will pay these charges. Loads are separated from a fund's expense charges and are an additional charge for owning the security.
Front-end loads, or Class A shares, is a one-time sales charge which investors pay at the initial purchase
Back-end loads, or Class B shares, is a one-time sales charge paid by the investor at the final sell
Level loads, or Class C shares, are annual charges, set at a fixed percentage, and submitted by the investor throughout the year.
The Calculation of the level load share fees come from the mutual fund's average net assets. Another difference between the level load and other loads is in the calculation of a fund's expense ratio. Front- and back- end loads are not part of the expense ratio. However, the expense ratio includes level load, 12b-1 fees.
While the load percentage does not change, if the net asset value of the fund increases through capital appreciation, the dollar value of the load will become more expensive and continuously erode the fund's return.
The Investment Company Act of 1940 set the maximum amount allowable for 12b-1 charges. These fees run between 0.25 and 1%. Fees cover the cost of running the mutual fund and include advisory costs, marketing, distribution and advertising. Funds which do not exceed the 0.25 fee level may call themselves no-load funds.
This bit of magic, as well as the dubious necessity for the 12b-1 in a robust mutual fund environment, has put the justification for continued use of level load under considerable consumer and regulatory scrutiny.
Benefits of Level Loads
Level-load payments allow investors to spread out commission payments, and they also enable the entire investment amount to be invested in the fund from the start since there is no front load commission to pay. Similarly, with the back-end load, the investor will receive the profit upon sell without the deduction of the final commission fees.
Level-loads appear among the other fees disclosed in a mutual fund's prospectus, but it is only one of several types of expenses which the investor may pay. Thus, when researching investments, investors should be careful to consider the full scope of all the associated fees with each investment, not just the dollar amount of the level load.
Real World Example
Consider an investor that invests $100,000 in the XYZ Company mutual fund. It has a 4% annual level-load. In year one, the investment grows to $120,000, but the intent is to continue to hold the fund.
At the end of year one, the expense is $4,800 ($120,000 x .04) paid from proceeds to the fund company, leaving $115,200 in the account. The investor holds the fund for another year, and it grows to $140,000. At the end of year two, they owe 4% of $140,000 ($5,600) leaving the investor with a $134,400 balance.
This payment structure continues for as long as an investor owns the shares in the fund. The rate of the load is constant level, but the payment amounts grow as the investment increases in value.
Now, let's say an investor invested the same amount of money in the same XYZ mutual fund, but they decided to sell the shares less than one year later. They still have to make a payment at the level-load rate. If the $100,000 had grown to $105,000 at the end of eight months, then they would still owe 4% of the $105,000. In this way, when an investor is ready to sell an investment with a level-load payment structure, the final payment is similar to a back-end load, although the rate is usually smaller.