A:

A mutual fund is simply a large group of people who lump their money together for a management company to invest. And, like most things in life, there are fees and commissions involved.

Mutual funds come in two main flavors, categorized by how the fees are charged.

A load mutual fund charges you for the shares/units purchased plus an initial sales fee. This charge is typically anywhere from 4% to 8% of the amount you are investing or it can be a flat fee depending on the mutual fund provider. This is added to your purchase as a sales fee. For example, if you invested $1,000 into a 5% load mutual fund, you would actually be investing only $950 with the remaining $50 going to the company as a commission.

There are a couple different types of load funds out there. Back-end loads mean the fee is charged when you redeem the mutual fund. A front-end load is the opposite of a back-end load and means the fee is charged up front.

A no-load fund simply means that you can buy and redeem the mutual fund units/shares at any time without a commission or sales charge. However, some companies such as banks and broker-dealers may charge their own fees for the sale and redemption of third-party mutual funds.

Most people recommend trying to avoid load funds altogether. Many studies have shown that both types of mutual funds offer the same return - it's just that one charges you a commission fee. One warning though, most no-load funds charge fees if you redeem them early (usually within the first five years), but, if you are a long-term investor, there is no need to worry.

(For more information, check out Mutual Fund Basics and Advantages of Mutual Funds and Disadvantages of Mutual Funds.)

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RELATED TERMS
  1. Load

    A sales charge or commission charged to an investor when buying ...
  2. 12B-1 Plan

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  4. Front-End Load

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  5. Load Fund

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