What's the difference between a load and no-load mutual fund?

Investing, Mutual Funds
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July 2016
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A loaded mutual fund typically charges a front-end or a rear-end load or cost. The load is a percentage (typically 1% to 5%) cost of the amount invested. If a mutual fund charges a front-end load, you will pay to enter the fund. i.e. If you buy $10,000 of a front-end loaded fund with a 5% front-end load, you will pay $500 to enter the fund. So you will pay $10,500 to buy $10,000 of that fund. If a mutual fund charges a back-end load, you will pay to exit the fund. If you sell $10,000 of a back-end loaded fund with a 3% back-end load, you will pay $300 to exit the fund. So you will get $9,700 if you sell $10,000 of that fund. 

When loads apply, you will usually see different classes of the same fund. A-class shares are usually the front-end loaded type. B-class shares are usually the back-end loaded type. Usually back-end loaded shares (B-class) have a declining schedule where you might pay 5% to exit in year one, 4% to exit in year 2, 3% to exit in year 3, 2% to exit in year 4, and 1% to exit in year 5. Once the surrender schedule is completed (usually in 5 years) the shares will convert automatically to the A-class that has no back-end load. You will usually find that B-class shares have a higher internal expense ratio than the A-class. It will thus cost you more annually while you hold the B-Class shares than holding the A-class shares. Many studies have concluded that A-class shares may work out better from a cost standpoint over a 5 year holding period.

No-load funds do not play this game. There is neither a front-end nor a back-end load. 

I find loaded funds to be too expensive and I rarely recommend them unless they have outstanding performance vs their peers and the load is waived. If you research mutual funds, you can usually find a comparable no-load mutual fund with an equivalent objective to the loaded mutual fund you are considering.

July 2016
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