Load Funds Vs. No Load Funds
Mutual funds can be classified as either a load or no-load fund. A load fund has a sales charge or commission built into the fund costs. In contrast, no load funds do not have these sales charges. The sales charge from a load fund reduces the amount of an investment that actually ends up in a new fund account. With a load fund, an investor must first earn back the cost of the load before the mutual fund investment starts to make the investor money.
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Front Load Funds
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The traditional load mutual fund has what is called an upfront sales charge. To buy shares, an investor pays a higher price for the shares than the current net asset value (NAV) or share price of the fund. The front load sales charge can be 4 to 6 percent of the amount invested. Front load funds will have a schedule of reduced sales charge percentages as the investment amount increases. These lower sales charges are called breakpoints. Front loaded fund shares are often referred to as class A mutual fund shares.
Back-end Load Funds
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Back-end loaded funds, usually referred to as class B shares, do not charge a fee when fund shares are purchased. Class B shares have contingent deferred sales charges (CDSC), which are charged if shares are redeemed in the first 5 to 6 years after purchase. Back-end loaded funds allow all of an investor's money to go to work from the initial investment. This share type has higher annual expenses than the class A shares and in the long-term -- 6 to 8 years -- the return from class A shares and B shares will be very similar.
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No-Load Funds
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No load mutual funds do not charge either a front load or CDSC. Investments and redemptions in a no-load fund are made at the NAV price. With a no-load fund, 100 percent of the investment amount will go to the purchase of shares. If an investor wants to sell or redeem shares, there usually is no charge. Some no-load funds charge a redemption fee if an investor sells shares soon after investing. These fees go into the fund portfolio instead of to the mutual fund company.
Mutual Fund Considerations
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Load mutual funds are sold by brokers and investment advisors. If someone needs professional investment advice to select mutual funds, he will invest in load funds. The fund fees go to pay a commission to the advisor. Investors with large amounts to invest can get load funds at breakpoints that significantly reduce the sales charge. No-load fund investors must do their own research to select mutual funds. Investors using no-load funds should have enough knowledge about the stock and bond markets to analyze the investment objectives and portfolio holdings of different mutual funds.
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