Load Fund

What it is:

A load fund is a mutual fund that carries a fee to purchase or sell its shares. This load is expressed as a percentage of the amount invested.

How it works/Example:

In general, there are two kinds of load funds: front-end loads and back-end loads. A front-end load is a fee paid to purchase an investment, and a back-end load is a fee paid to sell an investment (it may also be called a contingent deferred sales charge, an exit fee, or a redemption charge). A no-load fund is a mutual fund that does not charge any fees of this type.

Let's assume you are interested in making a $10,000 investment in the Company XYZ mutual fund. If the fund has a 4% front-end load, then of the $10,000 investment, $400 ($10,000 x .04) is paid to the fund company and $9,600 is actually invested in the fund. Ideally, the earnings from the investment should more than make up for the front-end load. In this example, the front-end loaded fund must return 14.6% in one year to reach $11,000 in value.

If the fund instead has a 4% back-end load, then you must pay a $400 fee upon the sale of the investment ($10,000 x .04). Again, the earnings from the investment should ideally more than make up for the back-end load. In this example, the back-end loaded fund must therefore return 14% in one year to reach $11,000 in value after the fee.

Clearly, the size of the load affects the size of the investor's return. In our example, if the Company XYZ fund is a no-load fund, then in order to reach $11,000 in value after one year, it only needs to generate a 10% return.

Frequently, investors are able to pay reduced loads if they make large investments. The amount that qualifies for a reduced load is called the breakpoint and varies from investment to investment. Some funds may have more than one breakpoint. In some cases, an investor can sign a letter of intent with the investment company, promising to invest a certain amount over time in order to qualify for the reduced load now.

Why it Matters:

Load funds discourage investors from frequently trading their shares, an activity that requires funds to have considerable amounts of cash on hand rather than invested. Generally, however, a load is considered payment for the broker's expertise in selecting the right fund for the investor. Notably, there is considerable controversy about whether load funds perform better or worse than no-load funds.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.