You just closed your first important deal at the new job. Not only do you feel good, but the boss presented you with an unexpected bonus check for $10000! Instead of spending the money, you do some financial research and decide that you like the idea of investing in a mutual fund. A mutual fund pools the money from many investors and typically buys stocks or bonds that have a common investment objective.
Mutual funds come in two main types, load fund and no-load funds. Load funds charge a sales fee that is basically a commission paid to the broker who successfully persuades you to invest in it. There are three ways that this fee can be assessed:
Front End Load (Class A Shares)-the fee is paid at the time the mutual fund is purchased. If a fund has a 5% front end load, $500 of your $10000 will be taken as a sales fee leaving only $9500 to be invested in the fund.
Back End Load (Class B Shares)-this fee is collected when you sell your shares. A back end load may not seem like such a bad deal since you are planning on a long term investment. However, emergencies do happen that may require you to sell your shares before you planned.
Constant Load (Class C Shares)-this fee is collected on an annual basis. You may be paying a sales fee each year in addition to normal fund expenses.
No-load mutual funds do not charge any sales commissions. Your investment is not reduced or penalized by these unnecessary fees. Before investing in a no-load fund, be sure to research the fund through one of the free quoting services that can be found on the Internet. Study the sections that describe the funds expenses. One type of fee to be wary of is a 12b-1 fee. These fees are supposed to be used to pay for advertising or marketing of the fund but are occasionally diverted to pay commissions. A fund can be considered a no-load fund if this fee is 0.25% or less per year. True no-load funds will have no 12b-1 fees.
The bottom line is that you should avoid investing in loaded mutual funds. You receive no benefit from these charges, and you are throwing away money that could be working for you instead of your broker. These fees have no effect on how well the fund will perform. The fund’s management fees are paid from the fund assets and not these sales commissions. There is no good reason to start with a loss when there are excellent no-load funds available for investment.