Mutual Funds: What Are Loads?

Mutual funds are broadly categorized as load funds and no-load funds. Basically, a load is the sales charge associated with buying the mutual fund. Typically, when you buy a mutual fund through a financial planner or broker you will pay a load, which is pocketed by the salesperson or another middleman.

Historically, there has been no significant difference in returns for load and no-load funds. When the load fees are factored into the mutual funds returns the no-load funds have a higher return. This is simply logical if you think about it. If two funds have the same return (as load and no-load mutual funds do) and you have to pay a sales commision on one (the load fund) than the other (the no-load mutual fund) will earn you more in the long run. As an example, if you invest $100 into two funds and each pays you a $10 return you've earned 10%. If one of them charges you $1 when you withdraw you earnings it's real return is only 9%. 10% is better than 9%, no-loan mutual funds are better than load mutual funds.

The most basic type of load is a front-end load mutual fund. With a front-end load mutual fund you pay a portion of your initial investment to buy the fund. Usually front-end load mutual funds charge 3-9% for the priveledge to buy the fund. One a $1,000 investment you lose $30 to $90 before you even own shares. Nice.

Invstors began to realize that paying front-end loads greatly diminished the amount of their investment. Mutual fund companies responded with Back-end loads pay the same 3-9% sales commision, but you only pay when you withdraw the money. Now, if the value of the investment goes up you pay more than you would with a similar front-end load. If the value of the investment goes down you still pay the fees and lose even more of your initial investment.

Even better than back-end loans are contingent deferred sales loads. Basically this is a back-end load mutual fund that says that every year you own the fund your load amount goes down by 1%. Now, this sounds like a good idea if you are planning on holding the fund as a long term investment. Salesmen will often market these saying that you don't have to pay any load, however, every year your account is charge with a 12b-1 marketing fee of about 1%. So, you pay 1% every year you own the fund. For example, a mutual fund has a 5% back-end load that diminishes by 1% annually. You hold the fund for two years. You've paid 2% in 12b-1 fees and now have a 3% back-end load left to pay. Still sounds like 5%, doesn't it? This gets even better if you hold the fund longer than 5 years. You pay that 1% per year regardless of how long you hold it. Really makes you want to be a long term investor, right?

The answer is to look for "no-load" mutual funds. They simply don't charge a load, saving you money and increasing your earnings in the long run.