Introduction to Load Funds

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Load Funds

Introduction to Load Funds

Mark P. Cussen Nov 20, 2014

Be sure to read A Brief History of Mutual Funds.

Basic Characteristics

For example, a fund that charges a 4.75% load for A shares will pay 4% to the broker, with the 0.75% going to the broker-dealer. A share funds charge the entire load at the time of purchase. B share funds will assess a sales charge if the fund is sold within a certain period of time. The charge that is assessed usually declines according to a preset schedule, such as 5% within the first year of purchase, 4% the following year and so on until the investor is able to sell the shares at no cost. B shares usually charge higher annual expense fees in return for the ability to buy and sell shares without paying a sales charge if they are held long enough. C shares usually charge a lower fee up front and then another low fee when they are sold. They often also have higher annual expenses than A or B shares.

Learn more about What Are Share Classes?.

The Public Offering Price (POP) is the retail price that investors pay for a fund, while the Net Asset Value is the actual value of a share of the fund without its sales charge. The difference between the two prices equals the sales charge percentage.

Most load funds offer breakpoints in their sales charge structures that favor larger purchases. For example, a fund that charges a 5.75% load for purchases under $25,000 will drop to 4.75% for purchases of $25,000 to $50,000. This charge could drop to 3.75% from there to $100,000 and then to 3% up to $250,000. The charge is reduced to 2% for purchases from $500,000 to $1,000,000 and is waived above that. The dollar breakpoints differ somewhat from one fund family to another, but most fund families offer a declining sales charge schedule of this format, and credit is usually applied towards the purchase of any fund in the family for this purpose.

Be sure to see our list of the Cheapest Mutual Funds for Every Investment Objective.

Pros and Cons

Of course, the most obvious disadvantage that comes with loaded funds is their additional cost. No-load funds do not have this expense and therefore often outperform their loaded peers, at least for shorter periods of time. In addition to their sales charges, load funds also assess annual fees called 12b-1 fees that are used to pay for the fund management. However, these sales charges can also discourage investors from buying in and out of these funds on a regular basis, as the load fee would quickly reduce the investor’s capital by a substantial amount.

Learn more about What is a Mutual Fund Management Fee?.

Industry Leaders

Davis New York Venture Fund (NYVTX) – This growth fund was incepted in 1969 and has usually outperformed the S&P 500 Index over longer periods of time. It is fairly unique in that it is owned and run primarily by the Davis family itself, which along with the fund portfolio managers has nearly $2 billion of its own money invested in its funds. The fund has a maximum 4.75% sales charge for A shares.

Washington Mutual Investors AWSHX – This growth and income fiduciary fund has stood the test of time for decades as a reliable stock fund that stays away from “sin” stocks such as alcohol and tobacco companies. It is offered by American Funds and charges a 5.75% load for A shares.

Franklin Income Fund FKINX – This fund is designed primarily to generate current income with a secondary objective of growth. It was incepted in 1948 and has never failed to pay a dividend in its history. It is one of many income funds offered by Franklin Templeton.

The Bottom Line

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