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.)

RELATED FAQS

  1. Why are simple-interest loans preferred by payday loan companies and pawn shops?

    Learn how you can invest in the corporate bond market without investing a large amount of capital through bond funds and ...
  2. Are so-called self-offering and self-management covered by "Financial Instruments ...

    Learn a little bit about the regulation of Japanese securities, particularly as it pertains to self-offering for investments ...
  3. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ...
  4. What happens when I want to sell my A-shares of a mutual fund?

    Find out what it costs to sell A-shares of a mutual fund and learn what factors influence the overall costs of investing ...
RELATED TERMS
  1. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  2. Unconstrained Investing

    An investment style that does not require a fund or portfolio ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  6. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...

You May Also Like

Related Articles
  1. Credit & Loans

    Why are simple-interest loans preferred ...

  2. Mutual Funds & ETFs

    Looking To Invest In Texas? Here Is ...

  3. Entrepreneurship

    MLPs: Is Now the Right Time to Invest?

  4. Professionals

    Indexing vs. Stock Picking: Which is ...

  5. Mutual Funds & ETFs

    4 Ways You Can Invest In Gold Without ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!