What Is a Load in Investing? Definition, Types & Examples

What Is a Sales Load in Simple Terms?

When an investor purchases or redeems shares of a mutual fund, the agent or broker who facilitates the transaction may charge a sales fee known as a load. This fee compensates the broker or agent for acting as an intermediary between the investor and the mutual fund company in facilitating the sale or redemption of the shares.

In other words, a load is essentially a sales commission paid by an investor on the purchase or sale of mutual fund shares.

Depending on the mutual fund, an investor may have to pay a load when they buy shares, when they redeem (sell) shares, or both. Some mutual funds sell and repurchase shares directly or via a partner broker and thus do not charge sales loads. These are known as no-load mutual funds.

In many cases, mutual funds offer different share classes (e.g., A, B, and C), and the sales loads charged vary between share classes.

How Are Sales Loads Paid?

Sales loads are always paid out of an investor’s invested balance. In other words, they are deducted automatically by brokers from an investor’s balance rather than being tacked on as an additional charge like sales tax.

What Is a Front-End Load?

A front-end load is a fee an investor pays when they purchase mutual fund shares. Front-end loads are most commonly associated with Class A mutual fund shares.

Expressed as a percentage of their investment, a front-end load comes out of an investor’s balance before it is put into the mutual fund. For instance, if an investor bought $50,000 worth of a mutual fund with a 4% front-end load, $2,000 would be deducted from that investment to pay their broker, and only $48,000 would actually go into the fund.

The downside of front-end loads is that they reduce an investor’s initial invested balance, which, if the fund ends up going up in value, can significantly affect their returns over time. For instance, if the hypothetical fund mentioned above returned 15% over two years, the investor would be missing out on $300 in returns that the $2,000 load removed from their initial investment would have produced over those two years.

In some cases, the front-end load percentage charged on a mutual fund investment decreases at higher investment levels in order to incentivize investors to dedicate more money to the fund.

What Is a Back-End Load?

A back-end load is a sales fee charged by a broker when an investor redeems (sells) their mutual fund shares. Back-end loads are most commonly charged on Class B mutual fund shares.

Like a front-end load, a back-end load is expressed as a percentage and is deducted from an investor’s total balance when they redeem shares.

The downside here is that this fee isn’t charged as a percentage of their initial invested balance—it is calculated on and deducted from their final balance at the time of the sale, which includes the investor’s positive returns, assuming the fund has gone up in value.
On the other hand, if the fund has lost value by the time the investor sells their shares, the back-end load is still calculated based on the investor’s final balance, so they don’t have to pay a fee on their lost money.

In some cases, back-end load percentages go down over time to incentivize investors to hold mutual fund shares for a longer time. For instance, a mutual fund’s back-end load might start at 5% but go down to 0% incrementally over the course of 10 years.

How Are Sales Loads for Mutual Funds Determined?

Interestingly, mutual fund loads are determined by the mutual fund company, even though they are paid to brokers and intermediaries as opposed to the fund itself. By setting load fees, a mutual fund company can incentivize brokers to sell their shares since they will be compensated for doing so.

Additionally, by creating fee structures that decrease either with the size of initial investment or the duration it is held before sale, mutual fund companies can incentivize investors to put more money into a fund and keep it there for longer.

As mentioned above, sales load structures and percentages often vary by share class, with Class A shares more likely to carry front-end loads and Class B shares more likely to carry back-end loads.

Some mutual funds offer Class I shares—which offer fewer and lower fees overall—reserved for institutional investors that are likely to devote more significant amounts of money to a fund. In some cases, however, Class I shares may be available to retail investors through an employer-sponsored retirement savings account like a 401(k).

Sales Load vs. Expense Ratio: What’s the Difference?

Sales loads and expense ratios are both fees investors may have to pay to invest in mutual funds, but they have different purposes.

Sales loads are fees paid to brokers or advisors by investors when they buy or sell shares of a mutual fund. The mutual fund company does not see any money from sales loads, as they exist to compensate fund distributors/dealers—not fund managers. Sales loads are paid once per purchase or sale of mutual fund shares and come out of the invested balance.

An expense ratio, on the other hand, is a recurring, annual fee paid to a mutual fund company to cover an investor’s portion of that fund’s ongoing operating expenses (e.g., employee salaries, rent, etc.). This fee compensates the manager(s) of the fund—not the broker who sells its shares.

Both sales loads and expense ratios are expressed as a percentage of an investor’s invested balance, and both are paid out of that invested balance.