What is a load fund?
A load fund is a type of mutual fund that requires commission payment to purchase and sell its shares. Investing in the load fund, a trader pays the load, which serves as a compensation to a financial intermediary, either an investment advisor or a broker, for their expertise in finding a proper fund.
The load can be paid at different stages of the investment:
- Front-end load, when the load is paid up front at the moment of purchase
- Back-end load, when the shares are sold
- Level-load, when the investor holds the fund
- Load fund meaning can be put in contrast with no-load funds, which do not presuppose a sales commission.
What you need to know about load funds
If the no load funds do not require commission, then why do so many investors choose investing in load funds?
The answer is expertise. Investors go for load funds to compensate their financial intermediary for undertaking research, recommending and selling the fund identified as the best possible option for the particular investor.
If you are a professional, capable of researching and making independent investment decisions on purchase and sale of mutual funds, the intermediary’s help can be optional. Some investors go for no-load funds to minimise expenses.
However, if you do not specialise in mutual funds trading, payments for experts’ research and investment decisions on your behalf can serve for your benefit. Load fund managers can help you take smart investment decisions, choosing the appropriate mutual fund to invest in.
Types of load funds: share classes
Back in the 1970s, mutual funds were criticised for high front-end sales loads, hidden charges and excessive commissions. To solve the issue they introduced several share classes providing investors with several options for paying sales charges.
Class A shares
Class A represents front-end load funds that presuppose an upfront sales commission on the total sum of the investment. The commission is used to pay for an investment advisor’s services and varies from five to eight per cent. Large investors can get discounts reducing the sales charge. Class A shares are considered a cost-effective solution for investors planning to invest large amounts of money for a long period of time.
Class B shares
In contrast with Class A, Class B does not presuppose a front-end sales commission. Instead, they require a back-end load if the investor sells their investment prior to the stipulated period, which is usually from five to eight years. Additionally, the investor will bear a redemption fee of up to six per cent. Although the Class B shares do not offer discounts, the back-end sales commission decreases over the investment period. After seven or eight years of holding, investors usually have a right to exchange the Class B shares for Class A.
Class C shares
Class C shares carry a level load of around one per cent through all the investment period, which makes it the most pricy class for long-term investors. This type is more suitable for investors, planning to hold the shares for a short-term period.
Despite the fact that load funds require paying commission, they are still preferred by many investments over the no load peers. Using services of the financial intermediary protects inexperienced traders and investors from making inadequate investment choices.