Say 'No' to Loaded Mutual Funds

Always Use No-load Mutual Funds.

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Stock brokers and insurance salesmen might try to convince you otherwise, but there really is no reason to ever buy a loaded mutual fund. Learn why you should stay away from loaded funds and how to spot them.

What are Loaded Mutual Funds?

When I use the term "loaded mutual fund," I mean a mutual fund that carries a sales load. A sales load is a mutual fund commission paid to brokers (or a person who goes by a different, creative title). Sales loads do not benefit investors. Load fees typically range from four to eight percent and the way they are paid varies:

Front-end load (usually class A shares) - you pay the sales fee up front.
Back-end load or deferred load (usually class B shares) - you pay the sales fee on your way out.
Constant load fund (usually class C shares) - you pay the sales fees every year and might even have to pay a full load when you sell.

Some writers will advise people that it is usually best to buy the front-end load if you are going to buy a loaded fund, but I won't do that because I believe you should never buy a loaded fund.
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Starting Two Steps Behind

By investing in a loaded fund, you automatically start off in a bad position.
A good way to think about load vs. no-load mutual fund investing is to imagine a race track.
The no-load mutual fund gets to start on the regular start line (see the race track image on the right). The loaded mutual fund must start a number of strides back. Assuming both these funds travel at equal speeds, which fund will cross the finish line first?

The answer is obvious - the no-load fund! When you pay a commission for the purchase of your fund, you automatically start off with a loss. For example, if you start off by investing $10,000, but you put it into a loaded fund with a 5% front-end load, you are really only investing $9,500. What do you get for your $500? Absolutely nothing. A salesperson might try to convince you otherwise, but I have never - I repeat NEVER - heard one good reason why you should ever purchase a loaded fund. The commission is not going towards the management of the fund. The commission doesn't buy you special privileges. For every type of loaded fund, there are many no-load alternatives that perform as well or better.

Use No-load Mutual Funds
By using no-load mutual funds, you avoid paying unnecessary fees. The one exception is 12b-1 fees which you should also avoid. There are thousands of no load mutual funds available to investors. You can buy them directly from the fund family or through a broker.