Mutual fund loads are sales charges that some investors pay when they buy or sell shares of a mutual fund. A front-end load is taken from the money at the moment of purchase, a back-end load is taken when shares are sold, and a no-load fund charges neither. The load pays the broker or other intermediary who sold the fund; it does not go into the fund's portfolio and it does not pay the fund manager.
The general word for any such charge is a sales charge. Loads sit alongside, and are often confused with, the ongoing costs counted in a fund's expense ratio. In the United States, loads are disclosed in the "shareholder fees" table at the front of every prospectus, and the broker-dealers that sell funds are bound by Financial Industry Regulatory Authority (FINRA) Rule 2341, which caps how large a load can be.
Mutual fund loads in plain terms
Think of a load as the fee an agent takes for finding you a home. Some agents take their cut when you move in, some take it when you move out, and some homes are rented directly from the owner with no agent at all.
A fund with a front-end load is like paying the agent on day one: part of your money never gets invested. A back-end load is paid on the way out, and usually shrinks the longer you stay. A no-load fund is bought directly, or through a platform that is paid in another way, so all of your money goes to work from the start.
Types of load
- Front-end load. A percentage of the purchase amount deducted before the shares are bought, typically on Class A shares. The buying price that includes the load is the fund's public offering price (POP).
- Back-end load. A charge on redemption, almost always structured as a contingent deferred sales charge (CDSC) that declines each year the shares are held and eventually reaches zero.
- Level load. A small CDSC (often 1% in the first year) combined with a high annual distribution fee, typically on Class C shares. The investor pays a little every year instead of a lump sum.
- No-load. No front-end or deferred charge. Under FINRA rules a fund may only be called "no-load" if its combined annual distribution and service fees, the 12b-1 fee, are no more than 0.25% of average net assets.
Which load an investor pays depends on the share class chosen.
How a front-end load is calculated
Loads are quoted as a percentage of the offering price, not of the amount actually invested, so the real cost is slightly higher than the headline rate. The load as a share of the money that ends up in the fund is:
Here is the stated sales charge written as a decimal. For a 5.75% load, , so the investor pays about 6.10% on top of the money that is actually put to work at net asset value (NAV).
Front-end loads usually fall as the purchase gets larger. The thresholds where the rate drops are called breakpoints, and investors can reach them by counting holdings they already own through rights of accumulation (ROA) or by promising future purchases in a letter of intent. Many fund families also let shareholders move between their funds without paying a new load, under an exchange privilege.
Regulation and limits
In the United States, mutual funds are registered under the Investment Company Act of 1940 and overseen by the Securities and Exchange Commission (SEC), while sales practices are policed by FINRA. FINRA Rule 2341 (the successor to NASD Rule 2830) caps the combined front-end and deferred sales charges of a fund without an asset-based sales charge at 8.5% of the offering price. Funds that charge an asset-based (12b-1) sales fee are capped at 7.25% of new gross sales, or 6.25% if they also pay a service fee.
Outside the US, loads are usually called initial and exit charges. In the United Kingdom, the Financial Conduct Authority (FCA) Retail Distribution Review banned adviser commission on new advised sales from 31 December 2012, which pushed the market towards "clean" share classes with no built-in sales charge. In the European Union, MiFID II requires firms to disclose all costs and charges, including entry and exit charges, before an investor buys. India's market regulator SEBI abolished entry loads on mutual funds in August 2009.
Loads in practice
Their share of the market has fallen as investors moved to no-load funds, fee-based advisory accounts and exchange-traded funds (ETFs), which carry no sales load. Fund companies commonly waive front-end loads on Class A shares bought inside workplace retirement plans or fee-based accounts, where the investment adviser is paid a separate fee instead.
A load is a one-time cost, so its effect on total return is largest over short holding periods and smaller over a long time horizon. An ongoing fee, by contrast, keeps compounding against the investor in the way compound interest works in their favour. So a front-end load can be cheaper than a level load for a long-term investor. A fund fact sheet shows returns both with and without the maximum sales charge.
Criticism
Critics argue that loads create a conflict of interest, because a broker earns more by recommending a costlier fund or class. In the early 2000s US examiners found that many investors had not received the breakpoint discounts they were owed, and in 2019 the SEC's Share Class Selection Disclosure Initiative led to settlements under which more than 90 advisory firms returned over $135 million to clients placed in costlier share classes. Supporters reply that a load is a transparent, one-off price for advice, and that every investment company must disclose it before the sale.