I recently received this “loaded” question from a young investor. Going back to basics every now and then is helpful for all of us. When investing in a mutual fund, know your ABCs. A ‘load’ refers to the commission structure for a particular mutual fund investment. Think of it like a weight that loads down your investment.
For mutual funds, there are different share classes denoted by a letter: A, B and C.
The higher the “load” or commission, the more difficult it makes to justify switching from one fund to another. (I prefer no load funds because of the lower overall costs and the flexibility to switch to other investments if needed. Think of this as similar to the difference between getting a mortgage with and one without paying points. If interest rates drop, you’ll find it easier to go ahead if you didn’t already pay out a lot in fees or points before).
Class A shares are those which carry an upfront sales charge or load.
Class B shares – not that popular anymore and frowned on by regulators – have no upfront charge but have a declining sales charge that is a percentage of the investment being redeemed (i.e. 5% in year 1, 4% in year 2, etc.). This was meant to deter folks from short-term investing in a fund.
Class C shares do not require any upfront sales charge but have higher internal expenses than the other two. These internal fees – typically 1% of the total assets invested plus possibly another 0.25% of total assets known as a section 12b(1) fee for marketing and distribution – are used to compensate the registered securities representative and his firm.
There are other class shares as well like Class I for institutional or Class R for retirement plan accounts. The differences between all of these shares revolves mostly on the minimum amounts needed to invest – $1,000 for investors in Class A, let’s say, versus $1,000,000 for an institution – and the internal expenses assigned to that share class.
Sometimes investors can go direct to the mutual fund investment company and pay a load. This is common with funds offered directly by Fidelity or American Funds. At other times, investment companies offer their funds directly to the public with “no load”. Fund families like T. Rowe Price and Vanguard are known for this.
If you’re working through a Registered Investment Adviser firm, you’ll have access to all funds without a “load” because you’re likely paying the investment adviser an “investment management fee” as a flat fee or a percentage of assets managed.
Whichever you choose depends on your goals and time frame for investing … and how your adviser is getting paid.