What is a Load Fund?

A load fund is a type of mutual fund where the investors are required to pay a certain amount as fees. This fee is paid to the broker, intermediary or financial advisor who assists you to invest in the right fund.

Generally, load funds are of two types, the first where fees are to be paid at the time of investing is called a front-load mutual fund. The other type is known as a back-end load fund where the fees are paid while selling or at the time of redemption.

The fees paid for load funds are not a part of the mutual fund’s operational expenses, but it is a kind of professional charge you pay to avail of the services. A broker would understand your financial goals and advise you to invest in a mutual fund that fits your requirement.

What is a No-Load Fund?

The primary reason for charging a load fee is to compensate fund managers and researchers to find schemes that maximize the returns. Many investors do not prefer to pay a load charge and opt for a No-Load fund.

This fund typically has very low load fees. The professional charges in no-load funds are deducted from the gross returns at the time of redemption. The load charge may be fully waived off if the investment is redeemed after a certain period.

How does load fund work?

A load fee is generally charged as a percentage of total investment. This method stays the same for both front load and back end load. The front-load mutual fund charges for investing while the back-end mutual fund charges for selling the mutual fund. The load charges vary for different AMCs.

For example, if an investor is aiming to invest Rs. 1,00,000 in a mutual fund scheme with a front-end load of 5%. The front-end load in this case would be Rs. 5,000. This charge is deducted from the initial investment amount and only Rs. 95,000 is invested.

In the case of a back-end fund scheme with a load of 5% and the initial investment amount of Rs. 1,00,000, the investor will have to pay Rs. 5,000 at the time of redemption. In both cases, it is necessary to get returns higher than the load fees charged.

Visibly, the size of the investment affects the load charges. But, few mutual fund houses even charge flat fees instead of percentages as load.

Types of load fund

Typically there are 3 categories of a load fund. A front-end load fund with load fees paid upfront at the time of investing, a back-end load fund where the load is charged at the time of redemption, and a no-load fund in which the professional charges are deducted from gross returns.

Due to heavy charges, mutual fund houses distributed the load fund in different share classes. These share classes are divided into Class A, Class B, and Class C shares.

All these classes have unique features like front end or back end load, options of a breakout, redemption fees, and flat charges. Total tenure of investment plays an important role while selecting share class, as charges and features will be different in all the cases.

Final Words

To sum up, load funds are a great tool for investing in a portfolio designed carefully by professionals through detailed research and analysis, that guarantees a better return.

Frequently Asked Questions

Why does load fund matter?

Load funds are important for two major reasons. Load funds were primarily designed to pay for the expertise of fund managers and brokers. But, it also inculcates the habit of long term investing.

Investors usually keep trading in mutual funds which forces fund houses to have more liquid cash than invested. Therefore, to change the habit of investors, load funds play an important role.

What is the importance of load funds in the stock market?

Load funds compensate fund managers and brokers for investing time and energy into the research of better stocks that generate higher returns. The compensation motivates them to create an enhanced stock portfolio.

The returns attract new investors to invest in them, indirectly infusing capital into the stock market. Apart from that, load funds create a habit of avoiding frequent trading which in turn brings a little stability in market volatility.

What is the load percentage in mutual funds?

The load percentage depends upon the type of mutual fund scheme. It generally varies from 1% to 8% in India. Until 2009, there was a load fee of 2.5% in the front end load fund. As it was impacting the mutual fund industry, SEBI banned the front end load fee. In case of back end load funds, the fees are applicable based on the fund houses.