What is a 'Load Fund'

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

BREAKING DOWN 'Load Fund'

If a fund limits its level load to no more than 0.25% (the maximum is 1%) it can call itself a "no-load" fund in its marketing literature. Front-end and back-end loads are not part of a mutual fund's operating expenses and are typically paid out to the selling broker and the broker-dealer as a commission. However, level-loads, called 12b-1 fees, are included as operating expenses. Funds that do not charge a load are called no-load funds, which are typically sold directly by the mutual fund company.

Comparing Loads of Different Share Classes

In the 1970's, mutual fund companies came under criticism for the high front-end sales loads they charged along with excessive fees and other hidden charges. As a result, they introduced multiple share classes giving investors several options for paying sales charges.

Class A Shares: Class A shares are the traditional front-end load funds that charge an upfront sales charge on the amount invested. Most class A funds offer breakpoint discounts that reduce the sales charge for purchases at higher thresholds. For investors with larger amounts of money to invest over a long period of time, class A shares can be the lowest cost option due to the breakpoint discounts.

Class B Shares: Class B shares include a back-end load or contingent deferred sales charge (CDSC), which is deducted when selling the shares. Class B share funds do not offer breakpoint discounts, although the CDSC decreases over a five- to eight-year timeframe. At that point, the shares are converted to class A shares with no back-end load. Some class B share funds also charge annual 12b-1 fees, which can increase investment costs over time. When Class B shares are converted to Class A shares, the 12b-1 fees go away. Class B shares with a low expense ratio can 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 typically lower than Class B shares. Class C shares rely more heavily on 12b-1 fees, which tend to be higher than Class B shares, and they can last indefinitely. Class C share funds do not offer any breakpoint discounts. Because of higher 12b-1 fees, Class C shares can be the most expensive option over the long term.

Advantages of Load Funds

Investors may automatically assume load funds are the better choice over no-load funds, but that may not be the case. Fees on load funds go to pay the investor or fund manager who does research and makes investing decisions on the client's behalf. These experts can sort through mutual funds and help investors make smart investment decisions they may not have the skill or knowledge to make on their own. Paying up front fees can also eliminate the need to sap investment returns by paying continual expense fees on the returns the fund achieves. 

RELATED TERMS
  1. C-Share

    C-shares are classes of mutual fund shares that are charged a ...
  2. Investor Shares

    Investor shares are mutual fund shares structured for investment ...
  3. B-Share

    A B-share is a class of shares offered in an open-end mutual ...
  4. Class B Shares

    Class B Shares are a classification of common stock that may ...
  5. Share Class

    Share class refers to different types of shares a company issues ...
  6. Contingent Deferred Sales Charge ...

    A fee (sales charge or load) that mutual fund investors pay when ...
Related Articles
  1. Financial Advisor

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  2. Retirement

    Which Fund Share Class is Best for Retirement?

    Mutual funds are a popular investment for retirement. Here's how to choose the best share class when investing in them.
  3. Retirement

    7 Reasons to Yank a Mutual Fund from Your 401(k)

    Not all mutual funds are created equal. Here are some practical tips for recognizing – and ditching– low-value mutual funds that might be in your 401(k).
  4. Financial Advisor

    What's Behind So Many Mutual Fund Share Classes?

    Despite the confusion they create, the number of share classes offered by mutual fund families will most likely continue to grow. Here's why.
  5. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
  6. Investing

    What are Class B Shares?

    Class B shares are one classification of common stock issued by corporations.
  7. Investing

    How to Pick a Good Mutual Fund

    Learn the basics of investing in mutual funds, including how to establish your goals and risk tolerance and choose the type of fund that's best suited to meet your needs.
  8. Investing

    Looking to Buy Mutual Funds Online? Here Is How

    Learn how to buy mutual funds online; discover which websites offer mutual fund trading services, how to choose a fund and typical fees.
  9. Investing

    New Rule Prompts Some Active Management to Cut Fees

    American Funds has filed with the SEC to create a new share class with lower fees.
RELATED FAQS
  1. How are a mutual fund's C shares different from A and B shares?

    Learn how a class C share differs from a class A or B share in relation to a mutual fund. Read Answer >>
  2. What's the difference between a load and no-load mutual fund?

    A mutual fund is simply a large group of people who lump their money together for a management company to invest. Shares ... Read Answer >>
  3. How does a no-load fund make money?

    Find out how no-load mutual funds make money, what the purpose of a sales charge, or load, is and why some funds have higher ... Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center