Loads are the most talked about fees that mutual funds charge. A "load" on a mutual fund is just another way of saying that the fund charges a sales commission for purchase, sale, or both. There are funds that charge loads and there are funds that do not charge loads (known as "load funds" and "no load funds" respectively). Load funds can charge either a front-end load or a back-end load, that can range between as low as 1% and as high as 8.5%, which is the legal limit.
Front-end loads are sales commissions that are paid up front at the time of your purchase. So, if you give a fund a $10,000 investment and it charges a front-end load of 5%, then the fund will take 5% of your investment (that's $500) and pocket it right away. Only what is left over after the load has been deducted will be invested into the fund (in this example, only $9,500 is invested in the fund from your initial $10,000 investment) Back-end loads charge their sales commissions when you sell (or "redeem") your shares. So, when you go to redeem your shares in a fund with a back-end load you will end up receiving whatever money the shares are worth minus the sales commission.
Funds that have loads justify it by saying that it discourages frequent trading (which it does), and that it enables the fund managers to invest the money more confidently, without having to keep a large amount of cash reserves ready for redemptions. But do load funds offer superior returns in order to justify the expense of the load? There is no evidence to suggest that this is the case. However, you probably shouldn't just disregard a mutual fund because it has a load. Loads are just one of many expenses that mutual funds charge. You may find that a mutual fund with a large load will often have much lower 12b-1 fees and management expenses than other funds. Also, if you are buying the fund for the long term, you should remember that you only need to pay the load once, upon buying or selling the fund, rather than on an ongoing basis.
Front-end loads are sales commissions that are paid up front at the time of your purchase. So, if you give a fund a $10,000 investment and it charges a front-end load of 5%, then the fund will take 5% of your investment (that's $500) and pocket it right away. Only what is left over after the load has been deducted will be invested into the fund (in this example, only $9,500 is invested in the fund from your initial $10,000 investment) Back-end loads charge their sales commissions when you sell (or "redeem") your shares. So, when you go to redeem your shares in a fund with a back-end load you will end up receiving whatever money the shares are worth minus the sales commission.
Funds that have loads justify it by saying that it discourages frequent trading (which it does), and that it enables the fund managers to invest the money more confidently, without having to keep a large amount of cash reserves ready for redemptions. But do load funds offer superior returns in order to justify the expense of the load? There is no evidence to suggest that this is the case. However, you probably shouldn't just disregard a mutual fund because it has a load. Loads are just one of many expenses that mutual funds charge. You may find that a mutual fund with a large load will often have much lower 12b-1 fees and management expenses than other funds. Also, if you are buying the fund for the long term, you should remember that you only need to pay the load once, upon buying or selling the fund, rather than on an ongoing basis.
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