Load Fund

Understanding load funds is crucial for investors considering this type of mutual fund, which includes a sales charge or commission. Unlike no-load funds, load funds require investors to pay an additional fee at purchase, sale, or annually, depending on the type of load. This fee compensates financial intermediaries for their advisory services. While load funds offer professional investment advice and can sometimes feature lower ongoing fees, they come with higher costs that may impact returns, especially for short-term or smaller investments. This blog explores the characteristics, advantages, and types of load funds to help you make an informed decision.

What is a Load Fund?

A load fund is a type of mutual fund with a sales charge or commission. When investors purchase shares in a load fund, they pay an additional fee, known as a load, compensating the sales intermediary, such as a broker, financial planner, or investment advisor, for their time and expertise in selecting an appropriate fund for the investor. 

Load funds can be contrasted with no-load funds, which do not carry a sales charge.  The load is either paid upfront at the time of purchase (front-end load) when the shares are sold (back-end load) or if the fund is held by the investor (level load). 

Understanding Load Fund 

Load funds are designed to provide investors access to professional investment advice and services. The load fee compensates the sales intermediary for helping the investor choose a suitable fund based on their financial goals, risk tolerance, and investment horizon. 

The load fee is typically a percentage of the amount invested or the amount sold. For example, if an investor invests $10,000 in a front-end load fund with a 5% load, they will invest $9,500, with the remaining $500 going towards the load fee. 

Load funds can benefit investors who plan to hold their shares for a long time, as the ongoing management fees are often lower than those of no-load funds. However, the load fee can significantly impact an investor’s returns, particularly for short-term investors or those with limited funds. 

Types of Load Fund 

There are three main types of load funds: 

1. Front-End Load Funds

Front-end load funds charge a commission at the time of purchase. If an investor invests $10,000 in a front-end load fund with a 5% load, they will be investing $9,500, with the remaining $500 going towards the load fee. 

Front-end load funds can be beneficial for investors who plan to hold their shares for a long time, as the ongoing management fees are often lower than those of no-load funds. However, the upfront commission can significantly reduce the initial investment amount, making it less attractive for short-term investors or those with limited funds. 

2. Back-End Load Fund

Back-end load funds, also known as deferred sales charge (DSC) funds, charge a commission when the investor sells their shares. The load is often a percentage of the value of the shares sold, and it can decrease over time. This means that the longer an investor holds onto their shares, the lower the load will be when they sell them. 

Back-end load funds can benefit investors who plan to hold onto their shares for long, as the load decreases over time. However, they can also be more expensive than front-end load funds for investors who sell their shares relatively quickly, as the load is based on the value of the shares at the time of sale, which could be higher than the purchase price. 

3. Level-Load Fund

Level-load funds charge an annual load fee for as long as the investor holds the fund. This means that the investor will pay the load fee every year, regardless of how long they hold the fund. 

Level-load funds can be less attractive than front-end or back-end load funds, as the investor will pay the load fee every year, which can eat into their returns over time. Additionally, level-load funds may have higher ongoing fees than no-load funds or front-end load funds. 

Advantages of Load Fund 

Despite the controversy surrounding load funds, there are some advantages to investing in them: 

1. Access to professional investment advice: Load funds provide investors with access to professional investment advice and services, which can be valuable for those who do not have the time or expertise to research and select appropriate funds on their own.

2. Potential for lower ongoing fees: Front-end load funds often have lower ongoing management fees than no-load funds, making them more cost-effective over the long term for investors who hold their shares for a significant time.

3. Potential for higher returns: Some investors believe that the professional investment advice and service provided by load funds can lead to higher returns over the long term, which may offset the cost of the load fee.

Examples of Load Fund 

Here are a few examples of load funds: 

1. American Funds Growth Fund of America (AGTHX)

Investment Structure: This fund charges a front-end load of 5.75%. If an investor wishes to invest $10,000, they will pay $575 upfront, leaving $9,425 to invest. 

Impact on Returns: If the fund has an expense ratio of 0.65% and earns a 7% annual return, the investor’s account would grow to approximately $17,000 after ten years. However, the initial investment was effectively reduced due to the front-end load. 

2. Janus Henderson Balanced Fund (JABAX)

Investment Structure: This fund charges a back-end load that starts at 5% and decreases to 0% after five years. If an investor puts in $10,000, they pay no upfront fee.   

Long-Term Holding: If the investor sells after three years, they will incur a 3% back-end load, which would cost $300. Assuming the fund has an expense ratio of 1% and grows at 7% annually, the investment could grow to approximately $12,000 after three years. After the back-end load, the investor would receive about $11,700. 

3. Oppenheimer Global Fund (OPPAX)

Investment Structure: This fund charges a level load of 1% annually, with no front-end or back-end loads. An investor putting in $10,000 would not pay any upfront fees. 

Cost Over Time: The annual cost would be $100 (1% of $10,000). Assuming a 7% annual return, the investment could grow to approximately $14,000 after five years, with the investor consistently paying the level load each year. 

Frequently Asked Questions