Load-Adjusted Return

What Is a Load-Adjusted Return?

A load-adjusted return is the investment return on a mutual fund that has been adjusted for the fund's sales loads and specific other charges, such as 12b-1 fees. Loads, or fees charged by some mutual funds for marketing or buying and selling shares, are like all other investment fees in that they have a significant effect on an investor's returns.

Understanding Load-Adjusted Returns

A load-adjusted return is how much of an actual return an investor sees after accounting for fees and sales charges are deducted from a mutual fund's performance. This return is therefore calculated after investment fees charged to buy and sell shares of mutual funds are subtracted from investment returns.

For example, if an investor puts $6,000 into a no-load mutual fund and earns a 10% return the first year, they will have earned $600 in capital gains if they decide to cash out. But if the mutual fund charges a 1% front-end load to buy shares, the investor would have to pay $60 when the fund shares were purchased, leaving $5,940 to invest. The same 10% return would then earn only $594, reducing it to a 9.9% load-adjusted return.

Active Funds and Load-Adjusted Return

Index funds do not charge a fee just to invest in their funds. Actively managed mutual funds do charge investors a fee, commonly referred to as front-end load, just to invest in their funds. Some actively managed mutual funds charge other types of fees, such as back-end loads or marketing and distribution fees, that may or may not apply depending on whether an investor withdraws all or part of their investment in the fund before a specified period.

Many investors advocate sticking to mutual funds that have no loads, no 12b-1 fees, and low expense ratios.

Index Fund Fees and Loads

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds adhere to specific rules or standards (e.g., efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.

Investing in an index fund is a form of passive investing. The primary advantage of such a strategy is the lower management expense ratio on an index fund. Since expense ratios are directly reflected in the performance of the funds, actively managed funds and their higher expense ratios are automatically at a disadvantage to index funds. As a result, many actively managed funds struggle to keep up with their benchmarks.

As a historical example, for the five-year period ending in 2015, 84% of large-cap funds generated a return less than the S&P 500. In the 10-year period ending in 2015, 82% of large-cap funds failed to beat the index.