What Are Mutual Funds Load Charges?
One way to differentiate between mutual funds is the classification as either load or no-load funds. No-load funds are purchased directly from the mutual fund company. Load funds are sold through investment advisors and include a sale charge or load to compensate the selling broker. For professional mutual fund investment advice, investors usually invest in some type of load mutual fund.
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Types of Loads
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A load mutual fund has either an upfront sales charge or a Contingent Deferred Sales Charge, or CDSC. The common terminology is front- or back-end loaded, and the shares are classified as class A or B shares. Front-end loaded class A shares have the sales charge included in the sales price. Back-end loaded class B shares have a load that is only charged if the investor redeems the shares within the first five to seven years.
Load Amounts
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The sales charges for a mutual fund is listed in the fund's prospectus in the shareholder fees table. Front-end loaded mutual funds typically have a maximum sales charge of 2.5 to 6 percent. The maximum sales charge allowed by law is 8.5 percent. Back-end loaded funds have a CDSC table listing the sales charge if the mutual fund investment is redeemed within the deferred charge redemption period. The deferred charge percentage usually steps down each year until it disappears.
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Sales Load Example
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The Franklin Rising Dividends fund is available in both class A and class B shares. This is usually the case for most load mutual funds. The maximum front-end sales charge on the class A shares is 5.75 percent. A front-end load is charged by increasing the cost of the fund shares by the loan amount above the fund Net Asset Value -- NAV. On December 17, 2010, the Franklin Rising Dividends Fund had an NAV of $32.92 and an offer price of $34.93. The difference is the 5.75 percent load.
CDSC Example
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Class B shares are purchased at the NAV price. The class B shares of the Franklin Rising Dividends Fund has a contingent deferred sales charge schedule of 4 percent for the first two years after purchase, 3 percent for the next two years, 2 percent in year five and 1 percent in year six. After six years an investor can redeem shares without any charge. To pay the broker commission, the class B shares have an extra annual expense of 0.75 percent of assets.
Load Fund Considerations
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The higher expense ratio for class B shares makes the investment choice between A and B shares cost about the same over the period the CDSC is in effect. Over a longer period of time the class A shares will outperform due to lower ongoing expenses. Class A shares can also be purchased with a reduced sales load for larger investments. These larger amounts are called break points. For example, the Franklin funds start charging a reduced front load at investment amounts of $50,000 and a zero percent sales charge for investment amounts over $1 million.
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