A mutual fund is made up of 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 are often categorized by how the fees are charged.
Load Mutual Fund
A load mutual fund charges you for the shares purchased plus an initial sales fee. This charge is anywhere from 4% to 8% of the amount you are investing, or it can be a flat fee, depending on the mutual fund provider. 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.
No-Load Mutual Fund
Shares in a no-load fund can be bought or redeemed after a certain length of time without a commission or sales charge. However, some companies, such as banks or broker-dealers, may charge their own fees for the sale and redemption of third-party mutual funds. Also, 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.
Most people recommend trying to avoid load funds altogether. Many studies have shown both types of mutual funds offer the same return, but load funds charge you a commission fee.
(For related reading, see: Mutual Fund Basics.)