Load is the fee or commission that an investor pays to a mutual fund when he or she buys or sells shares of the mutual fund.
When the investor buys the shares, the commission is called a "front-end load." On the other hand, if the investor sells his shares, the commission is called a "back-end load."
Some funds only charge back-end loads if the shares are sold within a certain amount of time after they were bought.
The argument for putting loads on transactions in mutual funds is that these loads will make investors less likely to trade in mutual funds often. If investors move in and out of mutual funds quickly, the funds have to keep a lot of cash on hand to cover the redemptions, which lowers the funds' returns.
Also, the costs of mutual funds go up when they trade a lot.
There are many reasons not to use load funds:
-The loads, or fees, that mutual funds get are given to the fund brokers. The loads don't give the fund manager any reason to try to make the funds do better. That is, there is no reason why the managers of a load fund should do better than those of a no-load fund.
In the last few decades, the returns of load funds and no-load funds have been the same (if the loads are not considered.) When the fees are taken into account, investors in load funds have made less money than investors in no-load funds.
When a salesperson knows he will get a commission from a load fund, he is more likely to try to sell that fund, even if it isn't doing as well as a no-load fund.
Mutual funds don't tell the truth about a lot. If an investor puts $1000 into a fund with a 5% front-end load, they only put $950 into the fund. So, the real load on his $950 investment is $50, which is a 5.26 percent load.
If a person has already put money into a load fund, it doesn't make sense for them to leave now. The payment has already been made for the load. Now, the only thing that should matter when deciding whether to hold or sell a fund is how the investor thinks it will do in the future. In some funds, the exit load changes based on how long the fund was owned. Check out the prospectus for the fund for more information.
Most of the time, investors should avoid load funds. However, there is one thing that investors should keep in mind. There are times when load funds are better than no-load funds. For instance, an investor can choose between class A and class B in a fund. Class A has a front-end load of 3 percent, while Class B has no load. The investor, however, doesn't read the small print, which says that Class B has annual fees of 1% 12b-1.
If the fund gains 10% every year, the return on Class A (starting with the actual amount invested of $970) will be
($970) X (1.10) X (1.10) X (1.10) X (1.10) X (1.10) = $1562
The money back for Class B will be
($1000) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) = $1532.
So, the example above is an exception, where the load fund will do better in the long run than the no-load fund (with 12b-1 fees).
The truth is that a no-load fund can't really be called "no-load" if it charges investors fees like 12b-1 and other fees.
