Load Fund

A load fund is a mutual fund with a sales charge or commission. This fee compensates intermediaries, like brokers or financial planners, for their expertise in selecting suitable funds for investors.
Load Fund
3 min

A load fund is an amount charged by a sales intermediary to the investor when he buys units of a particular mutual fund. The fund covers the service costs that accrue to sales intermediaries such as financial advisors, investment planners, and brokers.

The sales intermediary charges the fund to the investor as fees for providing his professional services. Such services include operating the fund as also for their expertise in advising the investor to choose the most appropriate fund. In this article, we’re going to explore load fund meaning, how it works, types, advantages, and things to consider before investing.

What is a load fund?

A load fund is a mutual fund with a sales charge or commission paid by the investor. This fee compensates brokers, financial planners, or advisors for their expertise in selecting the fund. Investors choose load funds to reward these intermediaries for their research, recommendations, and selling efforts.

The structure of the load fund, however, must be mandatorily mentioned in the offer documents of the mutual fund. It needs to be borne in mind that such funds are likely to affect the net returns receivable from mutual funds.

Key takeaways

  • A load fund is a type of mutual fund where the investor pays a predetermined amount to his financial intermediary as a sales charge or commission, and such a sales charge is a pre-fixed percentage of the entire amount invested.
  • Such financial intermediaries use their expertise and experience in selecting the most suitable investment option for an investor by making all necessary financial decisions for their clients.
  • A load fund helps the investor to make a well-informed investment decision to maximise his returns.

How does a load fund work?

Load funds are basically mutual funds that charge a certain commission or sales fee to purchase or sell their shares. The investor pays the load, which goes to compensate a sales intermediary, such as a broker, financial planner, or investment advisor, for their time and expertise in selecting an appropriate fund for the investor. The load is either paid upfront at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load).

Let us see how a load fund works, depending on whether it is a front-end, back-end, or level load fund.

  • Front-end load fund: A load fund may be front-end, which implies that it carries an entry load or an amount payable by an investor during his initial purchase of the mutual fund, and the said amount is a part of the cost of the mutual fund. The front-end load fund can be deducted from the price of the mutual fund, thus reducing its overall value. For instance, for an investor buying into a mutual fund for Rs. 10,000 with an entry load of 5%, the net investment value in the fund stands at Rs. 9,500, with Rs. 500 being deducted as sales charge or commission.
  • Back-end load fund: Also called exit load, this is an amount payable by the investor on selling his holdings in the mutual fund. Such commission is chargeable as the sales amount of the share value, and this exit load does not become a component of the earnings of the scheme. For instance, an investor receiving Rs. 10,000 from the sales of his investments with a back-end load of 1% actually earns Rs. 9,900 since Rs. 100 is deducted as the intermediary’s sales charge or commission.
  • Level load funds: These funds charge their investors a regular annual fee, which usually is a predetermined percentage of all assets being managed, for as long as they are shareholders in the fund. The fee is usually lower than both front or back-end loads, continuing indefinitely, and which potentially results in more cumulative fees over a period of time.

Load fund types

  • Class A shares: Such share classes comprise entry loads that the investor pays on his total amount of investment when purchasing the mutual fund. The level load is paid as brokerage or financial advisory charges. However, investors may reduce this sales charge by way of breakout discounts that class A shares offer. Moreover, this alternative has a negligible cost and is attractive to investors who deploy substantial amounts in various mutual funds. Charges for this particular share class vary between 5% and 8%.
  • Class B shares: This particular share class comprises an exit load payable by the investor when he exits the fund by selling out. The sales period ranges from 5 to 8 years and is usually pre-determined. The investor also needs to pay a redemption fee of up to 6%. Moreover, no breakout discount is available with this share class, but the back-end charges diminish during the total investment period. Furthermore, the investor can exchange Class B shares for Class A shares provided he has been holding the Class B shares for at least seven years. Once the investor converts to Class A shares, he also becomes eligible for breakout discounts.
  • Class C Shares: Class C Shares charge a level load of 1% throughout the entire investment period. Moreover, no breakout discount is available. This is also the most expensive but ideally suitable for short-term investors.

Advantages of load funds

Load funds offer several benefits to investors, including:

1. Expertise and guidance

  • Financial intermediary services: Load funds provide investors with the expertise and guidance of a financial intermediary, such as a broker or investment advisor, who helps select the most suitable investment option.
  • Research and analysis: Financial intermediaries conduct extensive research and analysis to ensure the best investment decisions for their clients.

2. Increased liquidity

  • Front-end Load: Load funds offer increased liquidity as investors can sell their shares without incurring additional fees.
  • Back-end Load: Load funds also provide liquidity as investors can sell their shares without incurring additional fees.

3. Reduced risk

  • Diversification: Load funds offer diversification by investing in a variety of assets, reducing risk, and increasing potential returns.
  • Professional management: Load funds are managed by experienced fund managers who make informed investment decisions.

4. Better performance

  • Historical performance: Load funds have historically outperformed no-load funds due to the expertise and guidance provided by financial intermediaries.
  • Breakpoints: Some load funds offer breakpoints or reduced sales charges for larger investments, making them more attractive for long-term investors.

5. Convenience

  • One-stop solution: Load funds provide a one-stop solution for investors, offering a range of investment options and expert advice.
  • Streamlined process: Load funds simplify the investment process by handling all the necessary paperwork and administrative tasks.

Disadvantages of load funds

Load funds have several disadvantages that can impact investments:

  • Front-end load: The upfront commission can significantly reduce the initial investment amount, making it less attractive for short-term investors or those with limited funds.
  • Ongoing fees: Load funds often charge ongoing fees, which can erode returns over time, making them less suitable for long-term investors.
  • Less transparency: Load funds may not provide clear information about fees and expenses, making it difficult for investors to make informed decisions.
  • Higher costs: Load funds typically have higher costs compared to no-load funds, which can negatively impact investment returns.
  • Limited flexibility: Load funds may have restrictions on buying or selling shares, limiting investor flexibility.

Factors to consider when choosing load funds

When choosing load funds, several factors must be carefully considered to ensure that the investment aligns with your financial goals and risk tolerance. Here are some key factors to consider:

1. Financial stability

The financial stability of the AMC offering the load fund is crucial. Ensure that the company has a strong financial foundation to support the investment.

2. Fees and expenses

Front-end loads can have a significant impact on investment returns, particularly for short-term investors or those with limited funds. Evaluate the fees and expenses associated with the load fund to ensure they are justified.

3. Historical performance

Compare the historical performance of load and no-load funds to determine whether the fees are justified. Consider the performance of similar funds with and without load fees.

4. Management team

A strong management team with a proven track record of success can justify the fees associated with a load fund.

5. Liquidity

Consider your liquidity requirements when choosing a load fund. If you need the invested funds in a short period, opt for liquid funds.

6. Investment strategy

Ensure that the investment strategy of the load fund aligns with your financial goals. If your goals match the strategy, it is a good choice for investment.

7. Exit load

Consider the exit load fees charged by the load fund. Opt for funds with the least or zero exit load to avoid additional fees.

8. Fund size

The size of the fund does not affect the investment objective, but a large fund size can change the investment pattern and strategy.

9. Regulatory bodies

Regulatory bodies like SEBI ensure transparency and disclosure of fees associated with load funds. This helps investors make informed decisions.

10. Time horizon

Consider your investment period when choosing a load fund. If you have a longer time horizon, you can invest in funds with a higher risk.

11. Risk tolerance

Evaluate your risk-bearing appetite and choose a load fund that aligns with your risk tolerance.

12. Expected return on investment

Consider your expected return on investment when choosing a load fund. Ensure that the fund's performance aligns with your expectations.

Final words

Investors must assess several factors, including load fees, before they invest in mutual funds. Load funds offer several benefits, such as increased liquidity, reduced risk, and better performance compared to no-load funds. However, they also have certain drawbacks, such as higher costs and limited flexibility. Ultimately, investors must perform due diligence and choose an option that aligns with their goals and investment horizon.

If you are an investor and want to start your investment journey, you can visit the Bajaj Finserv Mutual Fund Platform to learn more about mutual funds and SIPs. You can utilise the SIP calculator and lumpsum calculator to perform a thorough analysis of expected returns and choose mutual fund schemes that align with your investment goals.

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Frequently asked questions

What is a load fund vs no load?

The principal difference between a load fund and a no-load fund is the absence or presence of commissions or sales fees. A load fund charges sales fees, upon redemption, or upfront on an ongoing basis. Conversely, a no-load fund does not charge such fees.

Are Load funds Worth It?

The worth of a load fund depends on the investor’s individual circumstances, and investment preferences and objectives. That is why it becomes imperative to evaluate all potential benefits, risks, and costs that come with load funds carefully to check out how suitable they align with the investor’s investment strategy.

How do load funds work?

The workings of a load fund are based on charging the investor commissions or sales fees when he purchases or redeems his shares in a mutual fund. Such fees are paid to brokers, sales representatives, or financial advisors, for services they render to sell mutual funds to investors.

What is a load type?

The load type is the specific method or structure used by mutual funds to charge their investors commissions or sales fees. A load type is designed to pay off brokers, sales representatives, or financial advisors for their professional services to sell funds to investors. The most common loads are: sales load, exit load or deferred sales load, and level load.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.