Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail


What it is:

A level-load is a periodic fee (usually annual) paid by the investor during the time he or she owns the investment.  Level-load mutual funds are often referred to as "C Shares."

How it works (Example):

Level-loads are expressed as a percentage, and they must be disclosed to potential investors in the fund’s prospectus.  Let’s look at an example:

Assume you invested $10,000 in the XYZ Company mutual fund, which has a 4% annual level-load.  In the first year the investment grows to $12,000, but you are not ready to sell.  At the end of year one, you pay $480 ($12,000 x .04) to the fund company, leaving you with $11,520 in your account. You the fund for another year and it grows to $14,000.  At the end of year two, you owe 4% of $14,000 ($560) leaving you with $13,440.  This payment structure continues for as long as you own shares in the fund.  The rate of the load is constant (level), but the payment amounts grow as the investment increases in value.

Now, let's say you invested the same amount of money in the same XYZ mutual fund, but you decide to sell the shares less than one year later.  You still have to make a payment at the level-load rate.  If the $10,000 had grown to $10,500 at the end of eight months, then you would still owe 4% of the $10,500.  In this way, when an investor is ready to sell an investment with a level-load payment structure, the final payment is similar to a back-end load (although the rate is usually smaller).

Why it Matters:

Level-loads are most often associated with mutual funds.  As the number and popularity of mutual funds increased, level-load and back-end load funds soon became the norm.

Level-load payment structures allow investors to spread out commission payments, and they also enable the entire investment amount to be invested in the fund from the start.  However, the level-load structure can inadvertently encourage frequent trading of mutual fund shares, which forces some level-load mutual funds to keep more cash on hand instead of having it all invested.

Level-loads and other fees are disclosed in a mutual fund's prospectus, and it is important to understand that a level-load is only one of several types of fees that may be charged. Thus, when comparing investments, investors should be careful to evaluate all fees associated with each investment, not just the size of the level-load.

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