What is Level Load?

Most things come at a cost. These costs can be fixed expenses like rent or insurance or variable expenses like your personal care, entertainment, shopping, etc. investments are popular for their return-generating power, but it has a few expenses.

In the world of Mutual fund, these expenses can be in the form of a one-time charge, entry or exit load, recurring charge, management fee, or account fee. In this article, you will learn in detail what is a level load.

Level Load

An annual fee levied on an investor’s mutual fund holdings is called a level load. This fee is deducted from the investor’s mutual fund portfolio, acting as a source of capital for the distribution and marketing of the fund. Typically, this fee is given to the intermediate parties who sell the fund’s shares to the retail investors. This level load reduces an investor’s profits.

A level load is also known as the 12b-1 fee. It is often included in the expense ratio. The cost ranges from 0.25% to 1.0% of the fund’s total net asset. The level load cost was legalized after the introduction of the section in the Investment Company Act of 2040.

The expense ratio of a mutual fund also includes management fees associated with the fund. However, the expense ratio does not incorporate the buying and selling of the portfolio securities. Costs excluded in the expense ratio are front-end and back-end loads, contingent deferred sales charges (CDSC), and redemption fees, which, where applicable, are paid directly by the investors to the fund.

Level load shares are also known as the Class C shares as they charge a level load of about 1% throughout the investment holding period. The fee throughout the year makes it the most expensive class of shares in the long-term, thus making it more appropriate for short-term investors.

How does a Level Load work?

Level load shares have an annual fixed charge attached to them. It is collected by the investors during the year. The sole purpose of a level load charge is to fund the marketing, distribution, and servicing of the mutual fund.

Fund loading is a fee imposed on a mutual fund holding which is primarily paid in three ways: level load, front-end load, and back-end load. Level load differs from the front-end load as it carries charges paid during the share purchase. Similarly, it is different from the back-end load as it imposes the cost while selling the shares.

Front-end and back-end loads are excluded from a fund’s expense ratio whereas a level load or 12b-1 fee is included. According to the Investment Act 1940, a level load ranges from 0.25% to 1.0%. The level load charges are used to market and distribute the fund to wider investors and if marketing produces the desired outcome it can increase the fund’s Net Asset Value (NAV) and decrease the overall expenses based on economies of scale. The increase in NAV increases the absolute value (rupee value) of the fund while the percentage remains constant.

Advantages of a Level Loads

Level load charges help investors in spreading out commission payments and allow the investors to invest the entire initial amount due to the lack of the front-end load. Similarly, investors gain by selling the fund without the deduction of the final commission fees of the back-end fund.

Example of a Level Load

Suppose, you invest a lump sum of INR 1,00,00 in the ABC Mutual Fund. ABC Mutual Fund has a level load of 1% per annum. Now, consider two situations:

1. You hold the fund for one or more year
2. You sell the shares of the fund within one year

In the first case, if your investment grows to 1,20,000 at the end of the first year and you plan to hold the fund, you will be charged INR 1,200 (1,20,000 x 0.01) as a level load at the end of the first year. If at the end of year 2, the fund amount grows to 1,35,000, the level load at 1% for the 2nd year would be INR 1,350. This fee structure persists as long as you hold the fund. Evidently in the above example, while the rate remains constant, the amount grows as the investment value increases.

In the second scenario, if you plan to sell the shares of the fund at the end of 9 months, then you still have to pay the level load charge at the same rate. This kind of payment structure ultimately results in a back-end load when an investor finally plans to sell their holdings.

Frequently Asked Questions

What is a Level Load?

Ans: An annual recurring charge imposed on an investor’s mutual fund holding is known as the level load. It is utilized in the marketing and distribution costs of the fund.

What is the rate at which level load is charged?

Ans: The level load is charged at the rate of 0.25% to 1.0% of the net asset value (NAV) of the fund.

Does level load constitutes the expense ratio?

Ans: Yes, the level load is one of the components of the annual expense ratio of the fund. Front-end load and back-end load do not constitute the expense ratio.

What is the purpose of level load?

Ans: Level load is a kind of operational expense used to fund the marketing and distribution of a mutual fund.

How is a level load calculated?

Ans: Level load is calculated on the net asset value (NAV) as per the rate decided by the fund, mentioned in its prospectus. The maximum level load a fund can charge is 1%.