Mutual Funds by Design (What Is a Mutual Fund?)

Step 3: What's a Fund Load?

AAII materials focus on no-load and low-load mutual funds. Investors should realize that:

• A load is a sales commission that goes to the seller of the fund shares;
• A load does not go to anyone responsible for managing the fund's assets and does not serve as an incentive for the fund manager to perform better;
• Funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in performance calculations;
• For every high-performing load fund, there exists a similar no-load or low-load fund that can be purchased more cheaply;
• Loads understate the real commission charged because they reduce the total amount being invested: $10,000 invested in a 6% front-end load fund results in a $600 sales charge and only a $9,400 investment in the fund;
• If the money paid for the load had been working for you, as in a no-load fund, it would have been compounding over your holding period.

The bottom line in any investment is how it performs for you, the investor, and that performance includes consideration of all loads, fees, and expenses. There may be some load funds that will do better even if you factor in the load, but you have no way of finding that fund in advance. The only guide you have is historical performance, which is not necessarily an indication of future performance. With a heavily loaded fund, you are starting your investment with a significant loss—the load. Avoid unnecessary charges whenever possible.

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