Mutual fund sales loads are a commission collected by stockbrokers or mutual fund companies when they sell shares of mutual funds to investors.
What Is a Mutual Fund Sales Load?
A mutual fund sales load is a type of commission designed to to compensate brokers for selling a particular mutual fund. The broker is compensated with a percentage of everything they get their clients to invest.
A mutual fund sales load has nothing to do with the broker's performance and is a system that does not favor the investor. The sales load comes directly from your investment.
Types of Mutual Fund Sales Loads and How They Work
There are two types of mutual fund sales loads—front-end sales loads and back-end sales loads (also called deferred sales loads).
Front-End Sales Loads
These are marketing fees paid upfront at the time of the investment. If you invest $100,000 into a mutual fund with a 5% sales load, at the time you invest, $5,000 will be taken out of your account and used to pay the broker and other distributors that helped get you to choose that investment. That means you will begin with only $95,000 in money working for you. Over time, that can make a big difference.
If your mutual fund grew by 8% compounded for 50 years, a $5,000 sales load charge would result in you having $234,508 less in wealth.
Back-End Sales Loads
Also called deferred sales loads, these are marketing fees paid when you sell the investment. In this instance, all your money is working for you from the beginning, meaning more compounding growth if you selected a successful mutual fund or other investment product. It still takes a bite out of your holdings, but is less onerous over the long-run than front-end sales loads.
The back-end sales load is calculated in almost all cases of the initial investment made, not the ultimate value of the holding when you sell your position.
Some mutual fund back-end sales loads have a declining feature. This means that with each passing year, you would be forgiven for paying a portion of the sales load if you were to sell your investment.
In most cases, a declining back-end sales load would result in you owing no sales load at all if you held the investment for seven years or longer, which can encourage long-term thinking. You need to read the mutual fund prospectus to find out the details of your specific holdings.
What should be clear to you is that a mutual fund sales load results in less money in your pocket in most cases. That leads us to one of the most important rules of mutual fund investing: you should probably never buy a mutual fund that has a sales load.
Alternatives to Mutual Funds with Sales Loads
As a general rule, you should avoid mutual funds with sales loads attached. That is purely a marketing expense. You are paying a commission that the mutual fund company doesn't want to pay itself. It means you lose all of the dividends, interest, and capital gains you might have otherwise made on that money.
Companies such as Vanguard and Fidelity have made no-load funds the virtual norm for do-it-yourself investors. You can visit their site and open an account directly or even purchase shares through most stockbrokers or trading apps like Robinhood.
- A mutual fund sales load is a commission paid to a broker for selling a particular fund.
- This commission is not based on the broker's performance.
- The sales load is a marketing expense paid for by the customer.
- It makes no sense to buy a mutual fund with a sales load.