What are Loaded Mutual Funds?
When I use the term "loaded mutual fund," I mean a mutual fund that carries a sales load. A sales load is a mutual fund commission paid to brokers (or a person who goes by a different, creative title). Sales loads do not benefit investors. Load fees typically range from four to eight percent and the way they are paid varies:- Front-end load (usually class A shares) - you pay the sales fee up front.
- Back-end load or deferred load (usually class B shares) - you pay the sales fee on your way out.
- Constant load fund (usually class C shares) - you pay the sales fees every year and might even have to pay a full load when you sell.
Some writers will advise people that it is usually best to buy the front-end load if you are going to buy a loaded fund, but I won't do that because I believe you should never buy a loaded fund.
Starting Two Steps Behind
The no-load mutual fund gets to start on the regular start line (see the race track image on the right). The loaded mutual fund must start a number of strides back. Assuming both these funds travel at equal speeds, which fund will cross the finish line first?
The answer is obvious - the no-load fund! When you pay a commission for the purchase of your fund, you automatically start off with a loss. For example, if you start off by investing $10,000, but you put it into a loaded fund with a 5% front-end load, you are really only investing $9,500. What do you get for your $500? Absolutely nothing. A salesperson might try to convince you otherwise, but I have never - I repeat NEVER - heard one good reason why you should ever purchase a loaded fund. The commission is not going towards the management of the fund. The commission doesn't buy you special privileges. For every type of loaded fund, there are many no-load alternatives that perform as well or better.
