What It Is:
A load fund is a mutual fund that carries a fee to purchase or sell its . This 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 , and a 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 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 . If the has a 4% front-end load, then of the $10,000 investment, $400 ($10,000 x .04) is paid to the company and $9,600 is actually invested in the . Ideally, the from the investment should more than make up for the front-end load. In this example, the front-end loaded must return 14.6% in one year to reach $11,000 in value.
If the instead has a 4% , then you must pay a $400 fee upon the sale of the investment ($10,000 x .04). Again, the from the investment should ideally more than make up for the . In this example, the must therefore return 14% in one year to reach $11,000 in value after the fee.
Clearly, the size of the affects the size of the investor's return. In our example, if the Company XYZ is a no-load , 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 . The amount that qualifies for a reduced is called the breakpoint and varies from investment to investment. Some 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 now.
Why It Matters:
Load funds discourage investors from frequently trading their, an activity that requires to have considerable amounts of on hand rather than invested. Generally, however, a is considered payment for the 's expertise in selecting the right for the investor. Notably, there is considerable controversy about whether load funds perform better or worse than no-load funds.