Load funds, no load funds and low load funds

written by: Tim Stawman; article published: year 2008, month 05;


In: Root » Legal and finance » Stocks and mutual funds » Load funds, no load funds and low load funds

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Mutual funds can be classified as load funds, no-load funds, or low-load funds. The load fee is the sales charge, the amount the investor pays to buy shares. It is a direct deduction from the amount of money that actually goes to work for the investor in the mutual fund.

  • A no-load fund has no sales charge, and 100 percent of the investor's money goes into shares. For example, T. Rowe Price's GNMA Fund invests in U.S. Treasury securities and GNMA securities (also called agency securities), seeking high income potential with maximum credit quality. Because it is a no-load fund, there is no sales charge and 100 percent of your money is immediately invested in the fund.

  • A load fund charges a sales fee, which is used to compensate the sales force. For example, with a 5 percent load fee, the investor gives up 5 percent of the amount invested as compensation to the sales agent or broker. As one illustration, Merrill Lynch, a large brokerage firm, offers a variety of mutual funds. Its Healthcare Fund (A shares) has a load fee, or sales charge, of 5.25 percent of assets invested. An investor in this fund would give up this amount of the funds invested as a sales charge.

  • A low-load fund charges a fee of perhaps two to three percent (there is some variation here).

Some fund families, such as Fidelity, offer both no-load funds and low-load funds. For example, Fidelity's famed Magellan Fund, traditionally one of the two largest mutual funds in the country, has a load fee, or initial sales charge, of three percent. This would be roughly midway between a true no-load fund, with no sales charge, and a typical load fund with a sales charge of 5.25 to 5.75 percent of assets.

Of course, investors purchase a particular load fund because they expect the fund to perform better than comparable no-load funds, it has the objective they are looking for, the investor particularly likes the fund manager, and so forth. This whole issue—the pursuit of performance by investors as they seek out various actively managed funds—is the key issue that dominates our discussion of mutual funds.

It is important to understand that the load fee, or sales charge, is a straight deduction from the amount of money an investor puts in the fund. For example, with a $10,000 investment, a five percent load fee results in a $500 deduction to compensate the sales force, and the investor ends up with a net $9,500 investment in the mutual fund. In contrast, had the investor purchased a no-load fund, the entire $10,000 would go to work in the fund.

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