A mutual fund “load” is a sales charge or commission (i.e., a fee) paid by the person purchasing the mutual fund. Most or all of that fee is paid to the broker, financial adviser or whoever is encouraging you to buy the mutual fund. Loaded mutual funds come in three types:
- Class “A” mutual funds charge their fee when you buy the mutual fund. If you purchase $1,000 of a Class A mutual fund that charges a 5% load, then you will only end up with $950 of that mutual fund.
- Class “B” mutual funds charge their fee when the fund is sold. Again, if you purchase $1,000 of a Class B mutual fund, and then sell it in 5 years when it has a value of $2,000, and a 5% load is charged, then you will only take home $1,900 of that money.
- Class “C” mutual funds do not charge a front-end fee and may charge a lower back-end fee that disappears after a certain period of time, but they have higher annual expense ratios. Class C mutual funds will cost the most over a long period of time due to their higher expense ratios.
To be clear, all mutual funds charge an annual fee called an expense ratio, so the load is on top of the expense ratio. The expense ratio is charged throughout the year, so there is no trick to avoiding it. There are also 12b-1 fees, which are paid to the company that originally sold the mutual fund and are part of the expense ratio. No-load mutual funds do not charge 12b-1 fees. In addition to no-load mutual funds, there are also “LW” mutual funds, which stands for “load waived”, but they usually charge 12b-1 fees.
To be blunt, I loathe mutual fund loads and think we should all avoid them. There are passive, no-load mutual funds and exchange traded funds (“ETFs”) that can get you the same overall exposure as the loaded mutual funds, but at a fraction of the costs. The extra costs of a loaded mutual fund will destroy your wealth. Because I’m a nerd, I ran a simple spreadsheet calculation comparing the investment of $10,000 a year for 30 years into SLIAX (State Farm S&P 500 Index), which has a 0.73% expense ratio and a 3% front end load, to an investment of $10,000 a year for 30 years into VFINX (Vanguard S&P 500 Index) which is a no-load mutual fund with a 0.16% expense ratio. Assuming that they have the same 5% rate of return each year, and they should be close because they both track the S&P 500, the no-load mutual fund will be worth $87,000 more at the end of the 10 year period, solely due to fees. Again, on an investment of $300,000 over 30 years, which is very realistic, those extra fees cost $87,000. If you invest $1,000,000 or more in the market over your lifetime in the wrong funds, then your wasted fees will easily reach $100,000 or more.
Investment expenses are one of the greatest impediments to wealth, as every penny you pay in expenses is a penny that you are not keeping. Further, every one of those pennies is a lost opportunity to compound your gains, so the effects of loads and high expense ratios are magnified. Most importantly, in the formula for investment returns–which includes the amount invested, return on investment, inflation and expenses–expenses are the easiest to control. For this reason, I do everything in my power to help my clients avoid mutual fund loads in their 401(k) and other plans, and I never sell one to my clients.