What is a Sales Charge
A sales charge is a commission paid by an investor on his or her investment in a mutual fund. The sales charge is paid to a financial intermediary (broker, financial planner, investment adviser, distributor, etc.). Sales charges are expressed as a percentage of the investment value.
BREAKING DOWN Sales Charge
Sales charges are required by many mutual funds. Sales charges are quoted in percentages and equate to a percentage of the investment. Therefore, for an investor, their actual investment in the fund is equal to the difference between the investment value per share and the total sales charge. By regulation, the maximum permitted sales charge is 8.5%, but most loads fall within a 3% to 6% range.
Investors can incur various types of sales charges which are often associated with specific share classes of a fund. Sales charges are commission charges paid to financial intermediaries for their partnership in selling the fund. Sales charges are not paid to the fund itself and therefore are not factored into the gross and net expense ratio of a fund.
Some common types of sales charges include the following:
Front end – A front end sales charge is paid as a percentage of the purchase price at the time of the investment. Class A shares often have front end sales charges.
Back end – A back end sales charge is paid as a percentage of the selling price. Back end sales charges are often associated with Class B shares of a fund.
Deferred – A deferred sales charge is typically a back end sales charge that is often charged during a specific timeframe with a decreasing rate over time.
For example, assume an investor invests $10,000 in a mutual fund with a front-end load of 5.75%. The investor’s actual investment in the fund after the sales charge would be $9,425.
Sales Charges with Investment Funds
Sales charges can vary across different types of funds and shares classes. Many funds may not require sales charges due to distributor relationships. Investors should ensure they clearly understand the sales charges and fees associated with a fund. Fund companies typically provide comprehensive disclosure on their sales charges. Sales charges are also usually discussed in a fund’s prospectus.
Franklin Templeton for examples provides a comprehensive report on the fund company’s sales charges by share class: Franklin Templeton Sales Charges and Breakpoints. The company has tiered sales charges by purchase size. Sales charges vary based on share class and fund category.