A mutual fund load is the sales commission that an investor pays a broker when buying or selling certain mutual funds. While not all mutual funds have loads, those that do will vary depending on when the commission is paid. Front-end load mutual funds are the most common type of load funds. Let’s break down how they work.
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What Is a Front-End Load Mutual Fund?
A front-end load mutual fund charges investors a sales commission at the time they purchase shares of the fund. These mutual funds are made up of Class A shares, and the sales load is usually assessed as a percentage of the purchaser’s initial investment into the fund. Front-end loads typically range from 3% to 6%.
For example, if an investor wants to purchase $20,000 worth of shares in a particular fund that charges a 5% front-end load, $1,000 will be deducted from their initial investment leaving them with $19,000 in the fund.
What Are Other Kinds of Load Mutual Funds?
Front-end loads are the most common type of sales commission associated with load mutual funds. According to the Investment Company Institute, 91% of all money invested in load funds in 2020 was held in funds with front-end loads.
But they aren’t the only kind of load funds on the market. A back-end load fund is made up of Class B shares, charging sales commissions when shares of a fund are sold. A back-end load may be a flat fee or a percentage that will decline with every year the investor owns the mutual fund.
A level load, meanwhile, is charged neither up front or on the back end. Instead, it’s a fee assessed annually, usually totaling 1%. Level loads are typically associated with Class C shares.
Benefits of Front-End Load Mutual Funds
An investor may be drawn to front-end mutual funds over their counterparts above for several different reasons. First, front-end loads are owed solely on initial investments, not any earnings that a mutual fund may produce in the future.
Second, front-end charges are assessed only once and aren’t an annual expense like level loads. For example, friends Sally and Michelle both have $10,000 to invest. Sally chooses a front-end load mutual fund that charges 5% on her initial investment. Michelle opts for a mutual fund that charges a 1% level load each year.
Assuming their money grows at the same rate — 9% for 30 years — Sally will end up with thousands more than Michelle. While Sally had to initially fork over $500 to purchase shares in her front-end load fund, her investment grows to $126,043. Michelle, on the other hand, pays a 1% load each year, which eats into her returns. After 30 years, her $10,000 has only grown to $100,627.
Disadvantages of Front-End Load Mutual Funds
While front-end load funds may be cheaper in certain cases, they’re still more expensive than no-load mutual funds, especially passively managed index funds. Front-end loads also reduce an investor’s principal investment, and as a result, the money’s ability to compound over time.
Class A shares may also be less attractive to short-term investors. By paying a sales load up front, an investor with a short time horizon may not be able to recoup the front-end load depending on how the fund performs.
Front-end load mutual funds are pools of investments that carry an up-front sales charge due when an investor purchases the fund. The one-time fee will typically range from 3% to 6% of the initial investment, and will be paid to a broker or financial advisor. While more expensive than no-load funds, front-end funds may be more cost-effective than other mutual funds, especially those with Class C shares.
Tips for Investing
- Work with a financial advisor to develop an investment strategy that best suits your financial needs. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Consider how much fees and other expenses may impact your investments over long periods of time. Use SmartAsset’s investment calculator to get a clearer picture of how much your money can grow when invested.
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