In: Finance
What does it mean when a fund charges a “load”? Who gets the monies collected for the load? (Hint: it’s usually not the company managing the fund.) Some loads can be as high as 4-5%. Why would an investor be willing to pay a load for a fund when there are funds that don’t charge a load?
A load is a type of a sales charge which can also be called as a fee or commission. It could be a flat fee or a percentage of the transaction amount. Loads can be of two types - Entry Load and Exit Load.
Entry Load is paid at the time of purchasing the units of a scheme.
Exit Load is paid at the time of redemption/selling of units of a scheme.
Funds which are managed by high-end executives, brokers and bankers are paid hefty amounts for their expertise, time and research. The load amounts do not form part of the pool of the funds of the scheme rather are paid to the Asset Management Companies.
Typically, a no-load fund will have a lock-in period i.e. if units are redeemed before the completion of a specific period, the management firm will charge a fee for early redemption. This impacts the return of the investor. This is not an issue for a long-term investor. However, if the investor wants liquidity in his investments, then he may refrain from going into the lock-in period investment because of impacted liquidity and lesser returns.
Choice of fund types i.e. Load or no load funds depends upon the investor preference and overall returns from the funds. Any investor should carefully read about all the fees and charges of every type of funds before investing.