Those who deal in mutual funds, much like the clients investing with them, are out to make money. There are a variety of different ways they do this, and one of them is through something called a sales load.
Sales loads aren’t applicable to all mutual funds, as no-load funds do exist (as we shall discuss later), but when a broker recommends a fund for clients to buy, chances are it will be a load fund since it would be in their interest to recommend one. Sales loads essentially function as a commission, and are valued at a certain percentage of the actual investment amount.
Sales loads come in several varieties. The first is the front-end load. This type of load is quite easy to understand. The way that it works is to have a given percentage charged immediately upon purchase. The maximum sales load allowable by law is 8.5%, although most sales loads are smaller than that.
Another type of sale load is the back-end sales load. These are also sometimes known as deferred loads. Back end sales loads are fees that are charged upon the sale of the investment rather than when you buy it. This let’s all of the money work for you and benefit from compounding from the very beginning. Some of these back end sales loads have provisions in them which either reduce or completely eliminate the fees if you keep it for a certain length.
Finally, there’s something known as a level load. Level loads are ongoing management fees instead of having a fee upon buying or selling. By law, these are capped at 1% annually, but will typically be around .25%. These allow those who manage the fund to benefit from the effect of compounding. This makes level loads potentially the most costly, depending on how long it’s held.
A very important piece of information to keep in mind is that you should vastly prefer no-load mutual funds to funds with a load attached. Historically, no-load funds outperform load funds, especially when adjusted for the fee itself. Keep in min that your losses are not only limited to the 5% or so load itself, but the opportunity cost of all the lost compounding on that investment. So unless you have a particularly strong reason to opt for a fund with a load, stick with no-load mutual funds.