A mutual fund load fee is the sales charge an investor pays to buy into the fund. Mutual fund ownership gives investors access to a range of stocks and bonds, with trading and management handled by a professional mutual fund manager.
An Overview of Mutual Fund Fees
There are many types of mutual fund fees. Some fall under the umbrella of the Management Expense Ratio, including administrative costs, mutual fund manager salary, trailer fees or commissions, legal fees, and more.
Other expenses might include insurance or trading fees. Investors must inquire about and compare the fees charged by several different funds to get an idea of the actual investment value of each fund. A good rate of return can quickly disappear with a heavy fee structure. For more information on mutual fund fees, see Understand Fees Before Buying Mutual Funds.
The Difference Between Front Load, Back End and Level Load Mutual Fund Fees
Mutual funds that impose a sales charge on the investor on the purchase of the fund are called front load funds. Mutual fund companies realize that paying a percentage of the value of the fund as a sales charge made funds unattractive to investors, so many switched to back end loads, or contingent deferred sales load (CDSL) fees.
A CDSL fee takes away the front-end buying fee. However, in its place is an exit fee. Fund ownership comes with a schedule showing how the exit fee decreases with every year of ownership. This takes away from the value of the fund as a liquid asset; if an investor must sell the fund within a few years of ownership, they pay an exit fee.
A level load mutual fund fee is a small charge, usually a percentage of the overall value of the fund, taken from the investor for every year of ownership. So while there is no upfront sales charge or exit fee, returns are reduced by the amount of the level load fee each and every year the investor owns the fund.
Why No Load Funds Are a Better Investment
With all other considerations equal (the MER, fund performance, etc.) no load funds cost less. Ramit Sethis, New York Times bestselling author of I Will Teach You To Be Rich (Workman Publishing Company, March 2009) demonstrates in this 2006 blog post that no load funds perform just as well as, if not better than, mutual funds with load fees.
Whether load fees are disclosed and paid for up front, added to the fund as a cost to sell, or distributed over the life of ownership, they reduce the amount of money left to invest in that fund or elsewhere. To compare the actual costs and values of different mutual funds, visit the Financial Industry Regulatory Authority's Fund Analyzer, a unique expense calculator, with information and analysis on over 18,000 mutual funds.
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