Earlier this year, we wrote about the impact of fees on fund performance. These fees come in many shapes and forms. Here’s an explanation of some of the main ones so you’ll have a better understanding of what these fees mean when you next see them listed in a data table or prospectus.
This first installment in a two-part series focuses on load and no-load funds.
Load fees
Certain mutual funds (called load funds) pay their brokers commission for every investor introduced by the broker into the fund. This commission comes out of the investor’s pocket as a load fee, which is usually a percentage of the amount invested. The two main types of load fees are front-loads and backend-loads.
Front-load fee
A front-load fee is charged when the investor enters the fund. The fee is deducted from the starting investment amount, and the balance remaining is invested into the fund. For example, if you invest $5,000 into a fund with a 2% front-load fee, then the fee of $100 is immediately deducted from your investment amount. If there are no other charges, the remaining $4,900.00 is invested into the fund. So you’ll (unhappily) recognize that front-load fees immediately reduce the amount of money that goes to work for you from the start.
Backend-load fee
A backend-load fee (also called a deferred-load fee) is charged when investors sell their fund units in the fund. Certain backend-load funds reduce this fee based on the duration of investment. After a designated minimum holding period elapses, investors are usually not charged this fee.
The fee is deducted from the total amount withdrawn. For example, you invest $5,000 in a fund with a 2% backend-load fee. $5,000 is invested into the fund at the start, so all your money goes to work for you without any initial deductions. You make 10% in a year. Your original $5,000 investment is now worth $5500. You decide to sell all of your units – now the backend-load fee of 2% comes into effect and you are charged a fee of $110 (2% of the total amount that you are withdrawing).
Importantly, you can see from this example how the backend-load fee is charged on the original investment amount plus any returns that you have made. And yes, even if you’ve lost money on an investment, you’ll still have to pay the backend-load fee.
Breakpoints
Certain funds lower or even waive their load fees for investments that exceed a specific amount. The investment amount required to obtain the discount is called the breakpoint. The structure of these breakpoints varies from fund to fund, but the fund is obliged to disclose breakpoint information so don’t be afraid to ask.
No-load fund
A no-load fund means investors pay no commission or brokerage when entering or exiting the fund. There are a number of good mutual funds that do not charge a load fee – these might be a good option for you if you are investing directly without a broker.
In the next installment on fees, we’ll look at some other types of fees that could impact your investment and are worth investigating before you make your final investment decision.
