A mutual fund load is the commission you pay to buy a fund. Not all mutual funds charge a commission, but those that do typically offer various ways you can pay, known as share classes. Funds are legally allowed to charge up to 8.5 percent commission, but the competitiveness of the industry has generally brought those fees down substantially.
Class A shares charge a sales load upfront. If you ever sell the shares, you don't have to pay any additional commission. A typical upfront commission costs between 3 and 8.5 percent, with most falling around 5 percent. Like all mutual funds, Class A shares also charge annual expenses to help pay the costs of managing the fund. In spite of the large upfront charge, over time Class A shares can be the most inexpensive of all the loaded shares classes, as they charge lower annual expenses.
Class B shares offer you the opportunity to avoid an upfront sales charge and possibly any commission at all. With a Class B share, you only pay a sales load if you sell the fund, usually within the first six years. The amount of the charge, called a contingent deferred sales load, typically declines every year of ownership. Common costs are 5 percent for the first year, falling to zero in the sixth year. Class B shares generally carry high annual expenses due to the addition of a "12b-1" fee that costs 1 percent annually, on top of all other fund expenses. Most Class B shares convert to Class A shares after eight years of ownership.
A level-load or Class C share typically charges only a negligible fee of 1 percent or less for purchases or sales. However, like Class B shares, Class C shares carry an annual 12b-1 fee of 1 percent. Since level-load shares never convert to the lower-cost Class A shares, they can be even more expensive than Class B shares over long periods. However, for short-term holders, level-load funds provide the most flexibility for the lowest overall cost among load-carrying shares.
As the name implies, a true no-load fund carries no sales charge to either purchase or sell the shares, along with no additional 12b-1 fee. Some no-load funds may charge a short-term redemption fee to prevent active traders from moving in and out of the fund. In most cases, no-load funds are cheaper overall than any of the loaded share classes. No-load funds can keep costs low because they aren't distributed through a network of full-service brokers who earn a commission on the products they sell.
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.