What Are the Benefits of Front Load vs. Rear Load Mutual Funds?

Your investment adviser is paid by commissions.

Your investment adviser is paid by commissions.

When your investment adviser starts talking about mutual fund loads and deferred sales charges, the jargon can be mind-numbing. But hang in there -- this is important stuff. Front-loaded shares hit you with a commission or sales charge up front. With rear-loaded shares, the full amount of your investment goes to work, but you can be charged a redemption fee if you sell shares too quickly. At first glance, the back-end load looks like the better deal, but you may be much better off paying the load up front.

Terms and Function

A mutual fund company will refer to front-loaded shares as "class A" shares. With these shares, a sales charge percentage is added in the price you pay for them. For example, if the net asset value of a fund's A shares is $9.50 and the fund has a 5 percent load, you will pay $10 per share when you invest. At that point, shares you bought are worth the $9.50 NAV. Back-loaded class B shares are purchased at the NAV. If you dump B shares after investing, a "contingent deferred sales charge" will be subtracted from the sale proceeds. The CDSC is a declining percentage such as 5, 4, 3, 2 and 1 percent if you sell shares in years one through five after investing. The NAV for a fund's A and B shares may be slightly different amounts.

Lower Annual Expenses

The total annual expenses of a fund's class A shares will be lower than for the B shares. In the fund's expense breakdown -- available in its prospectus or on its webpage -- you will see something called the 12b-1 fee, which covers marketing expenses. To cover the cost of broker commissions, the fee for the B shares will typically be 0.6 to 0.75 percent higher than for A shares. This means that on a NAV basis, class B shares will under-perform A shares by up to 0.75 percent every year you own the fund. With A shares, broker commissions come out of the up-front load percentage.

Invest More, Save Money

While the maximum sales charge on the class A shares may be 5.5 or 5.75 percent, if you invest larger amounts, you jump to what are called "breakpoint" levels, with lower sales charge percentages. Lower breakpoint loads usually start when you have $50,000 invested in the fund, with even lower percentages at $100,000; $250,000; $500,000; and $1 million. For example, if you shell out $250,000, the sale charge may be 2.5 percent instead of 5.5 percent. You would receive the lower percentage on the full investment amount, saving thousands of dollars in load commissions.


Class B shares eventually convert to the lower-expense class A shares. The prospectus will state when this happens, but six to eight years after the purchase date is typical. As a result, the investment return on A shares at the maximum load and B shares will be very close by the time the B shares switch to the lower-expense model. If you sock away enough to qualify for a breakpoint, the front-loaded A shares are better return-wise than B shares, earning back the front-load and passing the rear-loaded shares in a couple of years, at most. The lower breakpoint percentage is good for all additional investments you make and any purchases of other funds from the same fund family. The benefits of the A shares breakpoints can be more widespread than just with your initial investment.

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