How Does a Front Load on a Mutual Fund Work?

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Introduction

Mutual funds are a popular form of investment. With a mutual fund the money of investors is pooled to buy and sell stocks, bonds, precious metals, commodities and other types of investments. Each mutual fund is professionally managed by a trained and experienced investment advisor. When it comes to buying shares in a mutual fund, there are a few things a potential investor needs to look at such as the fees of a mutual fund. There are a few options available such as load and no-load funds.

What is a Load?

A load is a sales commission or sales charge. There are a few different types of load funds. Many mutual funds are no-load funds which mean they don’t charge a sales commission. People are able to buy into no-load funds directly and fill out all the necessary forms themselves. Some mutual funds are front load funds that charge a fee when you buy. Others are back load mutual funds which charge a fee when you sell all or part of the shares. Yet another type is a constant load mutual fund that charges a fee at regular interval such as quarterly or monthly. Many front load funds are recommended by brokers, banks and financial advisors. In these cases the broker or banker will usually fill out the paperwork for the investor. These middlemen also get to keep the money from the sales charges.

How the Loads Work

When choosing a mutual fund the commission charge is one of the most important things an investor needs to consider. The commission fee is a percentage of the amount of money you buy or sell in a fund. The rate can be anywhere from 3% to 8%. If you invest $5000 in a front-load mutual fund and the sales commission is 5% then $250 is immediately removed from your account. Instead of having $5000 invested you have $4750. If a mutual fund is a back load mutual fund and the sales charge is 5%, if you have $5500 in your account, then $275 is removed from you account when you sell shares. The net profit is just $5225.

What Should You Choose?

Many investment publications and websites like The Motley Fool suggest that investors choose only no-load funds. With no-load funds all the money you put into the mutual fund is invested and if you sell shares of the fund, you get all of the profits. Another reason to invest in no-load funds is that studies have shown that no-loads perform better and get a higher return on investment or ROI than load funds. According to The Motley Fool, an investment website, “You should be aware that there is no real difference historically between the performance of load funds and no-load funds in terms of year-to-year performance. In fact, according to the latest survey by the mutual fund data analyzer Morningstar, even excluding the drag on returns if the load were included in the calculation, no-load funds actually have a superior record to load funds over the last 3-year and 5-year periods.”

How to Invest in a Mutual Fund

There are many sources of information about which mutual funds to buy. Business Week has an annual survey of mutual funds. Morningstar is another great source of information. One of the benefits of investing in a mutual fund is professional management. The fund manager chooses which stocks or bonds or precious metals to buy and after exhaustive research then determines the optimum time to sell so that the investors or shareholders in a fund make money. Another advantage of mutual funds is the diversification of the portfolio. With many different stocks or bonds in a fund there is less volatility and less risk to your investment. Before investing in a mutual fund read the prospectus or the legal information about the fund. With some research you can find the best mutual fund for your needs.

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