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.
The answers you've already received have been absolutely outstanding, so I really have no other information to add to answer your question directly.
What I love about your question is that you (along with many other investors) are getting dialed into the HUGE impact that fees can have on how much money you can save in retirement.
Although not directly related to your question, you can go to the attached article and see how lowering the fees you're paying by as little as 0.9% a year can add up to about an extra $1 million final balance in your retirement account after 50 years of saving:
Unfortunately, it is easy to rack up that extra 0.9% in fees whether that be via front-end or back-end sales loads or with funds that have high expense ratios.
As stated by the other advisors who answered your question so well, stay away from funds with loads. This will keep more money growing in your account and less money going out the door in unnecessary fees!
With Kind Regards,
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.
A load is a commission charged on the purchase and in some cases the sale of a mutual fund. There are different types of mutual funds with loads including ones that charge a sales load or commission upon purchase as well as funds that charge loads if sold within a specific number of years after purchase. Funds that charge a load upon purchase are known as front loaded and funds that charge a load upon sale are known as back end loaded. One tip off is that a mutual fund is a loaded fund if there is the word "Class" in the fund's description such as Class A or Class B shares.
Before buying a loaded mutual fund, you may get better results with lower cost by asking the broker if the load can be waived. In addition, finding a similar mutual fund in terms of risk, strategy and objectives with lower internal fees and no sales loads may be more beneficial long-term. Funds without loads are known as no load mutual funds.
Another site to visit is the National Association of Personal Financial Advisors (NAPFA.org) regarding the question on loads and other related cost. NAPFA's site has helpful information on how advisors charge for their services as well as a directory of advisors who are fee-only and therefore do not sell loaded mutual funds for commissions.
Great question. Essentially any fund with a "Load" is one in which you will need to pay a sales charge to get in (A shares) or get out of (B shares in the first 7-8 years, or C shares within the first year.)
Different fund families have different loads for their funds and will sometimes give discounts to investors (or households) that invest over certain thresholds. All of this information can be found in the fund prospectus which should be reviewed before buying the fund.
A "No-Load" fund is one in which there is no load (or sales charge) to buy into or sell out of that fund.
Always do some research on the fund before making a purchase.