Sales Charges (Loads)

Sales Charges (Loads)

Sales charges, also known as loads, are fees that investors pay when they buy or sell mutual funds. These charges are typically paid to the financial advisor or sales representative who sells the mutual fund, and can vary in amount and structure depending on the mutual fund company and the type of load. Sales charges can be front-end, back-end, or level-load.

Front-end loads are charged when an investor buys a mutual fund, and are typically a percentage of the investment amount. For example, if an investor purchases a mutual fund with a 5% front-end load and invests $10,000, they would pay a sales charge of $500 upfront. Back-end loads, also known as contingent deferred sales charges (CDSCs), are charged when an investor sells a mutual fund within a certain timeframe, usually five to ten years. These charges typically decrease over time and eventually reach zero. Level-loads, also known as 12b-1 fees, are annual fees that are charged as a percentage of the fund’s assets and are used to pay for distribution and marketing expenses.

Investors should carefully consider sales charges before investing in mutual funds, as these charges can significantly impact returns over time. While some investors may prefer to avoid sales charges altogether by investing in no-load mutual funds, it’s important to note that these funds may still charge other types of fees, such as management fees and expense ratios. Ultimately, it’s important for investors to understand all of the fees associated with a mutual fund before making an investment decision.

Loads are the commissions that an investor has to pay when he or she buys or redeems units of a fund. Sales charges may be applied when units of the fund are bought (a front-end load), when the units are redeemed (a back-end load), or no sales charges at all (no-load). Where front-end loads are charged, the rate can vary from dealer to dealer and may be negotiable. A load charged at the time of purchase is known as ‘Entry Load or Front End Load’ and charged at the time of redemption is known as ‘Exit Load or Back End Load’. Asset management companies charge these loads to settle up the selling and distribution expenses including commission paid to the agents/distributors.

An investor is not required to pay entry load where an application is not routed through any agent or distributor. Expenses related to NFOs have to be met from the entry load collected from the investors and cannot be charged to the investor through initial issue expenses route.

Many funds are sold on a back-end load basis, meaning that the sales charges are applied only when redeeming the fund. Back-end load fees are paid by the fund management company to the mutual fund salesperson. Any excess expenses over the entry load collected have to be borne by the AMC, Sponsor or the Trustee.

A ‘redemption fee’ is paid by the investor if he or she is redeeming the units in the fund before a certain time period, typically 5 years. Redemption fees decline each year that the investment is held. For example, Lisa might have to pay a 6% fee if she redeems the fund after one year, 4% if she redeems after three years, and no commission if she redeems after seven years.

An increasing number of funds are being sold on a no-load basis, in which investors pay no sales charges. This feature, along with other costs and fund performance, should however be checked before an investor invests. Other fees may also be charged by the fund when funds are being switched, open or close an account. Details are provided in the fund’s prospectus.