Thursday, August 18, 2011

How Does a Load Work in Investments?

If you plan to invest money in mutual funds, understanding the fees and expenses associated with buying and selling shares is essential to making proper decisions regarding the safety and security of your financial future.

Loads vary in size and the time and manner in which they are assessed to your account. The differences in how and when sales loads are added to mutual fund purchases are called share classes, and not all classes of funds are appropriate for all investors.

Investment Loads Explained

Loads are fees paid by investors when mutual fund purchases are made. These fees are charged at the time the purchase is actually made or are sometimes deferred until the the investments are sold.

Loads vary with mutual fund type and total money deposited, and their purpose is to pay commissions to the agency, broker, or other representatives involved in facilitating the sale.

Class "A" Shares

Class "A" shares of mutual funds charge a front-end sales load. This fee is deducted from the initial deposit amount, resulting in a smaller sum actually invested. Purchasing mutual funds with front-end sales charges typically results in the lowest possible recurring service fees.

Additionally, class "A" shares may qualify for reduced loads if your total investment deposits meet or exceed pre-defined breakpoints. For example, a $10,000 mutual fund investment may carry a 5.75 percent front-end load, while amounts between $25,000 and $50,000 carry only a 5 percent load.

Class "B" Shares

Class "B" shares of mutual funds do not deduct a load from your initial investment, but instead take this fee when you sell the shares. This back-end load, also called a contingent deferred sales charge, allows the entire deposit amount to be invested.

Since the sales fee is not paid at the time of the initial purchase, the ongoing service fees are noticeably higher. Additionally, class "B" shares do not qualify for breakpoints regardless of the total sum invested. However, if class "B" mutual fund shares are held for a long enough period of time, they typically convert to "A" shares and the deferred load is waived when the investments are finally sold.

Class "C" Shares

Class "C" shares of mutual funds do not charge either a front-end load or a contingent deferred sales charge. Instead, neither type of load is deducted from the investment deposit or at the time shares are redeemed.

However, since no sales load is paid when purchasing or redeeming "C" shares, the recurring service fees are significantly higher than for other share classes and breakpoint discounts are not available. Usually this share type is considered most appropriate for short-term time horizons.

No-Load Funds

Mutual funds that do not charge any loads are called no-load funds. Similar to "C" shares, no-load funds do not deduct a percentage of the investment amount at the time of purchase or redemption.

However, recurring service fees in no-load funds are typically lower than those in "C" shares. No-load funds are typically marketed to the do-it-yourself investor, because they are not sold or serviced by investment advisers.


U.S. Securities and Exchange Commission: Mutual Fund Classes
FINRA: Making the Most of Mutual Fund Breakpoints
The Skilled Investor: Understanding One-Time Investment Fees, Such as Sales Loads


Acumen Investment Services: What is a Mutual Fund Load?
Invest Safe: The Basics of Investing in Mutual Funds
Money-Zine: No Load Mutual Funds Investment Hype Versus Investment Help

Article originally published on The Motley Fool (08/18/2011), later on The Finance Base

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