Conflicting advice abounds with respect to front-load mutual funds, also called front-end funds. While Bloomberg and US News & World Report Money counsel readers to avoid these funds, financial author and radio host Dave Ramsey prefers them. An informed approach requires an understanding of the arguments in favor of and against such investments, consideration of your particular situation, and identification of funds that fit with your investment goals.
Front-load funds charge a sales fee when you purchase shares of the fund. The fee, called a load, is usually 3.0 percent to 5.75 percent of the sale. Almost all of the load is paid to the broker as a commission for recommending that particular fund. If a mutual fund has different classes of shares, front-load funds are invariably class A. Brokers justify the fee as a service charge for helping you pick a good investment.
Arguments against Front-Load Funds
When you invest in a front-load fund, you immediately experience a loss. For example, if you invest $10,000 and the front load is 5.75 percent, you are actually investing only $9,425.00. The broker's commission on this deal is $575.00. Given this incentive, brokers may be more motivated to make money by recommending front-load funds than by the desire to help you make money.
Arguments in Favor of Front-Load Funds
Proponents of front-load funds value the expertise of the broker who recommends the fund and are willing to pay this one-time expense. Since they are wary of the various fees that might be associated with managing no-load funds, they prefer to pay one large fee up front. Generally, they argue that front-load funds are better deals for long-term investments because you are less affected by the loss that you experience in the beginning.
The value of a fund lies in how profitable it is over time and how much you are charged by way of loads, management fees and other costs. A no-load mutual fund with minimal fees can easily be a better investment than a front-load fund, especially in the short term. The converse is equally true: A top-performing front-load fund that is held for the long term can be a better deal than a bad-performing no-load fund held for the same duration. The best approach is to determine how long you plan to keep the money invested and examine the performance of the fund in light of that time period.
- Bloomberg: The Worst Deal in Mutual Funds Faces a Reckoning
- U.S. News Money: Why Investors Should Avoid Load Funds
- U.S. Securities and Exchange Commission: Mutual Fund Fees and Expenses
- The Financial Coach: The Parade of Mutual Fund Charges: Understanding Loads
- DaveRamsey.com: Why Dave Prefers Up-Front Fees
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