Definition of Loaded & Unloaded Mutual Funds

By Shani Valdez

  • Overview

    Definition of Loaded & Unloaded Mutual Funds
    Mutual funds are expensive investment vehicles to run, with costs many times well concealed from investors. Performance is highly sold while fees are under discussed. However, performance and costs go hand in hand as earnings equate to performance minus costs. Thus, two questions that commonly arise among mutual fund investors are whether load-funds (Class A shares) outperform no-load funds (Class B and C shares) and which fund is most cost-effective?
  • History

    Investment firms offer both load-funds and no-load funds. Load-funds have an upfront or contingent deferred sales charge (CDSC) while no-load funds are generally free of commissions. Brokers advising clients on recommended funds will be more apt to suggest load-funds as they pocket those commissions as compensation for servicing the client with his time and expertise in selecting an appropriate fund. Class A shares offer qualifying investors breakpoints as a means to lower investment costs by discounting or eliminating fees altogether. Load-funds however, do not equate to stronger returns. Historically there has been no significant performance difference in load-funds and no-load funds when assessed on year-to-year performance.
  • Load-funds

    Load-funds have front-end or back-end loads. Class A and B share commissions cover payout costs to mutual fund advisors. Front-end loads range between 3 and 5.5 percent while back-end loads range from 5.5 percent to 1 percent when selling off shares during the first five to six years, and then drop off completely. Back-end C shares are level-load funds charging roughly 1 percent for every year you remain invested in the fund.

  • No-load Funds

    No-load funds have no upfront commissions, but sometimes are subject to back-end loads. Investment firms distribute no-load shares directly to investors and forgo a secondary party. 100 per cent of your money is invested and working for you in no-load funds. No-load C-shares are level-loads assessing yearly fees to promote the fund and communicate with shareholders. These fees and expenses are disclosed in the fund prospectus, with total projected expenses over typical holding periods presented in a standardized format to facilitate straightforward fund comparisons.
  • Significance

    While it may be tempting to buy only no-load funds, load-funds do have a place in your portfolio and shouldn't be ruled out completely. Buying only no-load funds may not be a good investment policy as your concern with should be the fund's long-term net return. It often isn't possible to select funds demonstrating the best long-term net returns that are solely no-loads. Many mutual fund investments are done through company retirement plans, which may offer only load-funds. And in many cases, funds displaying the best net return in particular sectors, such as global or international funds, may only be load-funds.
  • Cost Effectiveness

    It may seem counter-intuitive, but in the long run Class A shares may be more cost effective than Class B and C shares when factoring in the total expense ratio (the load, 12b1 fees, management, and other various fees assessed by the fund). It's very difficult for fund managers to outperform market indexes over the long run. Select funds that meet good performance requirements and transparency in operational costs while running low-cost operations.
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