Load is defined
as the fee or the commission that an investor
pays to a mutual fund at the time of purchasing
or redeeming the shares of the mutual fund. If
the commission is charged when the investor buys
the shares, it is known as a front-end load.
On the other hand if the commission
is charged when the investors redeems his shares,
it is known as a back-end load. Certain funds
apply back-end loads only if the shares are redeemed
within a specific time period after being bought.
The argument for applying loads on mutual fund
transactions is that these loads will discourage
investors from trading frequently in mutual funds.
If the investors quickly move in and out of mutual
funds, the funds have to maintain a high cash
position to meet these redemptions, which in turn
decreases the returns of the funds. Also frequent
trading means the expenses of the mutual funds
go up.
There are various arguments
against load funds: -
- The fees that the mutual
funds collect as loads are passed on to the
fund brokers.
- The loads do not provide
any incentive for the fund manager for better
performance of the funds. In other words, a
load fund has no reason why its managers should
perform better than those of no-load funds.
In the last few decades, no
difference has been seen in the returns of load
and no-load funds (if the loads are not considered.)
When the loads are considered, the investors of
load funds have actually gained less than the
investors of no-load funds. When a sales person
knows that he is going to get a commission from
a load fund, he tends to push the load fund more
- even when the load funds are performing poorly
as compared to no-load funds.
Loads are understated by mutual
funds. If an investor invests $1000 in a fund
with 5% front-end load, the actual investment
is only $950. Thus his actual load is $50 in $950
investment - a 5.26% load. If an investor is already
invested in a load fund, it doesn't make sense
to exit now. The load has already been paid for.
The hold or sell decision should now only be based
on what the investor thinks about the future performance
of the fund. In a few funds, the exit load depends
on the period for which the fund was held.
Check the details of the fund
prospectus for more information. In most cases
it is better to avoid load funds; however, investors
should keep one thing in mind. Sometimes load
funds can be a better choice than no-load funds.
For example, an investor has
a choice of two classes in a fund - class A and
class B. Class A has 3% front-end load and Class
B has no load. The investor however misses the
fine print, which states that Class B has 1% 12b-1
annual fees. If the fund will make 10% gains each
year, its return in Class A (starting with actual
amount invested $970) will be ($970) X (1.10)
X (1.10) X (1.10) X (1.10) X (1.10) = $1562 For
Class B, the returns will be ($1000) X (1.10)
X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X
(1.10) X (0.99) X (1.10) X (0.99) = $1532. Thus
the above example is an exception, where in the
long run, the load fund will perform better than
the no-load fund (with 12b-1 fees).
The fact is that a no-load fund
cannot be considered a true no-load fund, if it
charges fees from it\'s investors in the form
of 12b-1 and other fees.
Article
Source: http://www.premierdirectory.org/
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