Many investors believe smaller, lesser-known companies offer better opportunities to find market beating returns. Small cap mutual funds specialize in buying and owning shares of such companies. If you buy a small cap fund recommended by a broker, that fund will probably include a sales charge or load that reduces your net investment amount.
Load vs. No-Load
To avoid paying any sales load, you can invest in no-load mutual funds. The trade-off with no-load funds is that you have to do your own research and will not have the benefit of recommendations from a financial adviser. Also, many of the top-rated small cap mutual funds are of the load variety. Of the 20 top-rated small cap funds at The Street stock market website at the time of publication, 12 were load funds compared to eight no-load funds. The large mutual fund families offered by investment advisers -- all load funds -- have produced some of the better performing funds in the small cap category.
Average Load Percentages
The maximum sales charge percentage on a specific small cap fund will be the same as for all of the stock funds offered by the mutual fund family. Depending on the fund family, upfront maximum sales loads range from about 4 percent up to 5.75 percent. According to the "2012 Investment Company Fact Book" from the Investment Company Institute, the average sales maximum sales load for stock mutual funds was 5.4 percent in 2011. For broker sold stock funds, loads of 5 to 5.75 percent are most common.
Sales Load Discounts
Front-end-loaded mutual funds don't have just one load percentage. For larger investment amounts, fund companies charge a lower load. The investment level at which lower loads kick in are called break points. For stock funds, the first break point is usually at $25,000 or $50,000. Additional break points and corresponding lower loads are usually set at investment amounts of $100,000, $250,000, $500,000 and $1 million. Your financial adviser will tell you if you qualify for a lower load or if your planned investment is close to a break point level.
Break Point Qualifying
You can qualify for a lower break point load on your small cap fund investment in several ways. Fund companies allow you to combine the value of different fund investments in the same fund family and to combine the values of the fund company funds in different accounts owned by your family. For example, if you already own $100,000 of another fund from the same mutual fund family, your small cap fund investment would pay the load at the $100,000 break point level. You can also sign a letter of intent stating that you will invest enough to reach a break point over a certain period -- usually 13 months -- and pay the lower load from your first investment dollar.
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