In general, there are two kinds of loads: front-end loads and back-end loads. A front-end load is a fee paid to purchase an investment, and a back-end load is a fee paid to sell an investment (it may also be called a contingent deferred sales charge, an exit fee, or a redemption charge). A no-load fund is one that does not charge any fees of this type.
Let's assume you are interested in making a $10,000 investment in the Company XYZ mutual fund. If the fund has a 4% front-end load, then of the $10,000 investment, $400 ($10,000 x .04) is paid to the fund company and $9,600 is actually invested in the fund as a result. Ideally, the earnings from the investment should more than make up for the front-end load. In this example, the front-end loaded fund must return 14.6% in one year to reach $11,000 in value after the fee.
If the fund instead has a 4% back-end load, then you must pay a $400 fee upon the sale of the investment ($10,000 x .04). Again, the earnings from the investment should ideally more than make up for the back-end load. In this example, the back-end loaded fund must therefore return 14% in one year to reach $11,000 in value after the fee.
Clearly, the size of the load affects the size of the investor's return. In our example, if the Company XYZ fund is a no-load fund, then in order to reach $11,000 in value after one year, it only needs to generate a 10% return.
Front-end loads vary widely and may apply to reinvestments of dividends, interest, or capital gain. This mutual funds are often referred to as A Shares. When looking at mutual fund trading information, front-end loaded mutual funds will have ask prices that are greater than the fund's net asset value (or bid price). The ask price equals the fund's net asset value plus the front-end load.
Back-end loads are commonly assessed on the beginning value of the investment, although some companies calculate the fee on the ending value if it is lower than the original purchase price. Back-end load mutual funds are often referred to as B Shares. Generally, back-end loads are reduced for each year the investor holds the investment. If the investor holds the investment long enough, many funds waive the back-end fee. For example, a back-end fee might be 5% in the first year, 4% in the second year, and so forth until the fee is zero.
Frequently, investors are able to pay reduced loads if they make large investments. The amount that qualifies for a reduced load is called the breakpoint and varies from investment to investment. Some funds may have more than one breakpoint. In some cases, an investor can sign a letter of intent with the investment company, promising to invest a certain amount over time in order to qualify for the reduced load now.