A load fund is a mutual fund that assesses a sales charge or commission upon the purchase or sale of its shares.
Understanding load funds
When an investor purchases a load fund, a portion of the money pays an intermediary – such as a broker or financial advisor – for selling the fund. This fee compensates the advisor for researching the mutual fund and recommending it to the client. For Elephants researching their investment options, reading the fund prospectus is the primary way to identify the exact percentage of the load.
The timing of the commission determines the specific category of the load. Front-end loads are deducted at the time of the initial investment. This reduces the actual amount of capital that buys into the mutual fund. Back-end loads are charged when the investor sells the fund shares. Back-end fees typically decrease over time and reach zero if the investor holds the mutual fund for a set number of years. Level loads apply a consistent annual fee over the duration the mutual fund is held.
The specific regulatory structures governing mutual fund commissions differ across countries, but the concept of paying for distribution is standard in international markets. Load funds are the direct alternative to no-load funds, which do not charge sales commissions and are bought straight from the fund provider. The presence of a load pays for the advisory service and is not an indicator of the mutual fund’s future returns.
Example
An elephant named Barnaby wants to invest in a mutual fund focused on peanut agriculture across different continents. Barnaby consults a financial broker to select the right mutual fund. The broker recommends the Savanna Agricultural Fund, which is a load fund with a 5% front-end load. Barnaby decides to invest $10,000. Due to the front-end load, $500 is paid directly to the broker as a sales commission. The remaining $9,500 is invested into the Savanna Agricultural Fund to purchase shares. Barnaby accepts this cost in exchange for the broker’s research and execution services.