Legal Definitions - load fund

A load fund is a type of mutual fund that charges a sales commission or fee when investors buy or sell shares, or sometimes on an ongoing basis. This commission, known as a "load," typically goes to the broker or financial advisor who sold the fund. Load funds contrast with "no-load funds," which do not charge such sales commissions. The purpose of the load is to compensate the sales professionals for their services and advice.

There are different types of loads:

• Front-end load: A sales charge paid at the time of purchase, deducted from the initial investment.
• Back-end load (or contingent deferred sales charge - CDSC): A sales charge paid when shares are sold, typically decreasing over time and eventually disappearing if the shares are held for a sufficiently long period.
• Level load (or 12b-1 fee): An annual fee deducted from the fund's assets to cover marketing and distribution expenses, which can be considered an ongoing load.

Examples:

• Example 1 (Front-end load): Sarah decides to invest $10,000 in a mutual fund recommended by her financial advisor. The fund has a 5% front-end load. This means that before her money is even invested, $500 (5% of $10,000) is deducted as a sales commission, and only $9,500 is actually used to purchase shares in the fund. This illustrates a load fund because a direct sales charge was paid upfront to the advisor, reducing the amount of capital initially invested.

• Example 2 (Back-end load/CDSC): David invests $20,000 in a mutual fund that has a 4% back-end load if shares are sold within the first year, decreasing by 1% each year thereafter. Due to an unexpected expense, David needs to sell all his shares after 8 months. When he sells, he will incur a 4% sales charge on the value of his redemption, which will be deducted from his proceeds. This demonstrates a load fund because the sales commission is applied at the time of sale, rather than purchase, as a penalty for early withdrawal.

• Example 3 (Level load/12b-1 fee): Emily invests in a mutual fund that doesn't charge an upfront or exit fee but has an annual 12b-1 fee of 0.50%. This fee is continuously deducted from the fund's assets to cover marketing and distribution costs, including ongoing commissions paid to her financial advisor for service. Over the years, as her investment grows, this small percentage adds up, reducing her overall returns. This exemplifies a load fund because the sales and distribution costs are paid through an ongoing fee rather than a one-time transaction charge.