Mutual Fund Loads

Mutual funds are a good investment choice for many people, but it is important to understand the fees that are charged by investment firms offering this type of investment product. Fees can eat up all of an investor’s gains from mutual funds, so it is necessary to manage and track these fees just as carefully as you track the performance of the fund itself.

Over the past three decades mutual funds have become a popular investment for people who want to gain exposure to the stock markets. These funds invest in a variety of different stocks, allowing individual investors to diversify their portfolio.  While there are large differences in the funds that are available, most can be classified into no-load and loaded funds. No-load funds are those without any sales charge; these funds earn money primarily by paying a maintenance fee to the broker based on their earnings. Funds that do have sales charges are called loaded funds.

Loads are defined as the sale charges that are the cost to the investor to buy into the mutual fund. These charges are used by the brokerage to pay financial advisers for their advice, recommendations, and management of the fund.  Loaded funds come in three types. Type “A” shares are considered to be front-end loaded, type “B” shares are considered to be back-end loaded and type “C” shares have variable load schemes.

Front-end loaded, or type “A” shares are adviser recommended funds. Front-end loaded funds have a sales charge or load that is paid by the investor only once when the fund is originally purchased. After this, the only other expense involved with owning the mutual fund is the ongoing operating expense or maintenance fee, that is typically charged by the brokerage to manage the mutual fund.

If a mutual fund offers a reduced sales charge these front-loaded or “A” shares can be a good investment for someone with a lot of money to invest and a long investment time-frame. Front-loaded funds are also ideal for anyone who does not believe they will redeem their shares, making these types of investments ideal for family trusts.

On the other hand, back-end loaded shares, otherwise called “B” shares, have what is termed a “contingent deferred sales charge.” This means that no sales charge is paid by the investor upon purchasing his or her shares.  Instead, a  specified amount of money is charged over the first several years that the mutual fund is owned. Maintenance fees will also apply. “B” shares are usually more suitable for investors who do not have a lot of cash.