Investors in mutual funds incur two primary kinds of expenses and fees: fund expenses and loads. Whereas fund expenses are paid indirectly from fund assets throughout the year, sales loads are one-time fees that investors pay either at the time of purchase or when units are redeemed.
A fund’s prospectus will enlist certain charges under Annual Fund Operating Expenses. These charges include Management Fees, Distribution or Service Fees, Other Expenses and Total Annual Fund Operating Expenses. These expenses are charged indirectly as they are paid out of fund assets.
Separately, Shareholder Fees are fees and charges imposed directly on investors for transactions. Sales Load is included in this section along with Redemption Fee, Exchange Fee, Account Fee and Purchase Fee.
SEC Definition of Sales Load
“Funds that use brokers to sell their shares typically compensate the brokers. Funds may do this by imposing a fee on investors, known as a "sales load" (or "sales charge (load)"), which is paid to the selling brokers. In this respect, a sales load is like a commission investors pay when they purchase any type of security from a broker. Although sales loads most frequently are used to compensate outside brokers that distribute fund shares, some funds that do not use outside brokers still charge sales loads. The SEC does not limit the size of sales load a fund may charge, but FINRA does not permit mutual fund sales loads to exceed 8.5%. The percentage is lower if a fund imposes other types of charges. Most funds do not charge the maximum.”
So, Sales Load are usually one-time charges or commissions that investors need to pay either at the time of purchasing a fund or selling. Thus, it can either be front-end load or back-end loan charges. Front-end load charges are commissions paid at the time of initial purchase. It is usually deducted from invested amount, thus lowering the actual investment value. Back-end loads are paid at the time of offloading mutual funds. It is also known as contingent deferred sales charge or load.
Front and Back End Sales Loads
Front End Sales Loads: These are fees that an investor must pay at the time of investment. Also categorized as “Sales Charge (Load) on Purchases”, these are charges an investor pays while purchasing a fund. The front-end sales load is deducted from the actual invested amount, and the remaining portion is actually used to buy funds. For example, a front-end sales load of 5% will deduct $500 from an investment of $10,000 and the remaining $9,500 will be used for buying funds.
Back End Sales Loads: These are fees that an investor must pay while selling the investments. Categorized as the “Deferred Sales Charge (Load)", these fees are deducted while redeeming fund shares. The advantage of back end sales load over front end sales load is that the entire capital (minus other charges) is invested at the time of purchases. The sales load here is calculated off the initial investment made and not based on ultimate fund value.
Impact of Sales Load on Investment Return
It is obvious that sales loads will have an inversely proportionate impact on the net return. The chart below will show what an initial investment of $10,000 will return in 1, 3, 5, 10 years considering annual return of 10% with front-end sales charge of 0%, 2.5%, 5% and 7.5%, respectively. We have not considered any operating expenses or other fees. The ending value includes opportunity costs.
|Year||Front-End Sales Load|
|One||$11, 000||$10, 725||$10,450||$10,175|
3 No Load Funds from Best Performing Sectors in 2014
Energy, Utilities and Healthcare sectors currently fill the top 3 slots for the best gains year to date among the S&P 500 industry groups. Energy Select Sector SPDR ETF (XLE), Utilities Select Sector SPDR ETF (XLU) and Health Care Select Sector SPDR ETF (XLV) have scored gains of 13.6%, 12.7% and 11.9%, respectively, so far this year. We will pick 3 no-load funds from each sector. Apart from carrying no sales loads, these funds also have very low expense ratios.
These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
Fidelity Select Natural Gas Portfolio (FSNGX) seeks growth of capital. The fund invests most of its assets in natural gas companies engaged in both upstream and downstream operations. It also invests in companies engaged in exploration of potential natural gas sources and those that provide service and tools to natural gas producers and refineries. The non-diversified fund invests in both US and non-US companies. The fund has returned 21% year to date.
The fund carries no Front End or Deferred Sales Load as compared to category average of 5.24% and 2.27%, respectively. The fund has an expense ratio of 0.84% as compared to category average of 1.46%.
Fidelity Select Utilities Portfolio (FSUTX) invests a lion’s share of its assets in companies involved in the utilities industry or those earning most of their revenues from utility operations. The fund uses fundamental analysis for its investment decisions apart from looking into market and economic conditions. The non-diversified fund invests in both US and non-US companies. The fund has returned 15.4% year to date.
The fund carries no Front End or Deferred Sales Load as compared to category average of 5.06% and 2.36%, respectively. The fund has an expense ratio of 0.80% as compared to category average of 1.20%.
Fidelity Select Health Care (FSPHX) invests the majority of its assets in companies whose principal operations include production, design and sales of health care related products or services. The fund focuses on acquiring common stocks and purchases both domestic and foreign securities. The fund has returned 18.6% year to date.
The fund carries no Front End or Deferred Sales Load as compared to category average of 5.28% and 2.37%, respectively. The fund has an expense ratio of 0.76% as compared to category average of 1.38%.
To view the Zacks Rank and past performance of all Zacks #1 ranked mutual funds, investors can click here to see the complete list of funds.
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Read the analyst report on FSNGX
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Read the analyst report on XLV
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