When it comes to mutual funds, there are two types:
- Load Funds
- No-Load Funds
But which is right for you? The short answer is probably the no-load mutual fund. Why? Because theses are the mutual funds that will not charge you anything for the privilege of investing in them. Before you get involved in mutual fund investing, it is a good idea to understand the difference between load fee mutual funds and no-load mutual funds.
What are loaded mutual funds?
A load is basically a sales fee charged by mutual fund managers. It is a fee, usually right around 5 percent, but anywhere between 3 and 8 percent, that a broker or mutual fund manager charges you upfront for picking a good mutual fund that should perform well. Indeed, the reasoning behind loaded mutual funds is that the superior fund will perform better than something you could have found on your own. A mutual fund load comes in three main types:
- Front-end load
- Back-end load
- Level load
Front-end load: This is the most obvious of loads. It is charged up front. So, if you are investing $10,000 into a mutual fund, $500 of it is automatically taken out as a fee. It´s the load. So, really, you are only investing $9,500. These are referred to as "Class A" shares.
Back-end load: A back-end load comes with no up-front fee, but it catches you at the back. When you exit, you pay a fee. Usually, these fees decrease by 1 percent each year until you have the mutual fund for 6 years. Then you are not charged an exit fee. However, at the same time, some mutual funds charge what is known as a 12b-1 marketing fee of 1 percent. This means that even if you are not paying an exit fee, you are still paying a fee, no matter how long you are investing in the mutual fund. Not all back-end load mutual funds charge marketing fees. These are called "Class B" shares.
Level load: A level load charges a fee every single year that you are investing in a mutual fund. This is usually only 1 percent, but for long-term investors those fees start to add up. These are known as "Class C" shares.
Why you should avoid loaded mutual funds
So, if the better performance of the funds more than makes up for the fees, why not pick a loaded mutual fund? Unfortunately, loaded mutual funds have not been shown to perform better than no-load mutual funds. They perform almost the same. So, why does one pay the load fee? Right. There really isn´t a reason. The only real reason to pay the fee is if you prefer to have a fund manager, and if you prefer the convenience. If your fund is likely to perform the same, whether chosen by you or not, and you prefer to have someone else pick it while you read the statements to ensure it is actually performing decently, a loaded mutual fund is probably right for you.
However, if you want to maximize the amount of money that you are investing (which in turn leads to higher returns), then a no-load mutual fund is for you. More of your money will go directly toward working for you, rather than finding its way into someone else´s pocket.