Definition of Loaded & Unloaded Mutual Funds
Mutual funds that have sales charges or commissions to buy shares are called load funds. Unloaded, or more commonly no-load, funds do not have sales charges to purchase shares. Investors need to understand how loads work and whether they should invest with load or no-load funds. The answer may not be as obvious as it seems.
Other People Are Reading
-
Function
-
The value of a mutual fund share is called the net asset value, or NAV. The NAV is the value of the fund's portfolio of securities divided by the number of shares outstanding. Investors buying shares with a load, or sales charge, will pay a share price higher than the NAV. No-load fund investors buy shares at the NAV. After investing, load fund investors will own shares worth the NAV, but their account values will be worth less than the amount invested because of the load they paid.
Identification
-
The sales charge on load funds can range from 1 percent to 8 percent of the NAV. Loads for stock funds are typically 4 percent to 6 percent, and bonds funds will be lower. For front-loaded mutual funds, this percentage is subtracted from an investor's initial investment amount. Another type of load fund is the back-end loaded fund. Often referred to as class B shares, back-end loaded shares are purchased at NAV, but investors are charged a declining redemption fee if they sell the shares in the first four to six years.
-
Effects
-
Investors who purchase a load fund have their investments reduced by the amount of the load, and the sales charge reduces the total return from the mutual fund. For example, say an investor invests $25,000 in a load fund with a 4 percent sales charge. After the sales charge, the account starts with a value of $24,000. In other words, $1,000 of the investment was subtracted to pay the sales charge. No-load fund investors have 100 percent of their money working from the first day they invest in the fund.
Considerations
-
Load mutual funds are sold by stock brokers and investment advisers, who earn commissions paid out of the sales charge. Investors who want to use an investment adviser for advice will be offered either front- or back-end loaded funds in which to invest. The major load fund families provide advisers a wide range of mutual funds to offer their customers. No-load fund investors must do their own research and paperwork, and analyze a fund's investment style and potential.
Benefits
-
Investors with a large amount to invest in mutual funds can get the benefits of both load and no-load funds. Load mutual funds reduce the amount of the sales charge for larger investments, starting at levels of $50,000 or $100,000. The sales charge is eliminated for investment amounts of $1 million or more. Different funds of the same mutual fund group and accounts for investor family members can be combined to reach the lower load thresholds, called break points. Investing in mutual funds with large sums of money allows investors to receive professional investment advice and pay little or no sales charge.
-
References
- Photo Credit A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
