Mutual funds are often a good investment if you're looking to acquire an instantly diversified portfolio and professional management of your money. But just like picking individual stocks, you have to do your research to find the right mutual fund to meet your investment needs. One of the things you should consider before investing is how much it costs to buy shares. Some mutual funds charge a front-end load while others don't.
Front End Load
Some mutual fund companies pay sales persons, such as your investment broker, to sell shares of the fund. The sales person gets a commission based on the size of the transaction. This commission is called a front-end load -- and it comes out of the amount you pay when you buy the fund shares.
The amount of the front-end load varies by mutual fund. The maximum load permitted under rules of the Financial Industry Regulatory Authority is 8.5 percent as of 2012. Any front-end load you pay reduces the amount of your investment that actually goes to buy shares of the mutual fund. For example, XYZ mutual fund might charge a front-end load of 8.5 percent. If you invest $5,000 with the fund, you'll pay a front-end load of $425, which means only $4,575 is available to purchase shares of the mutual fund. Mutual fund companies commonly offer reduced loads for larger investments. The increments at which the load is reduced are call break points.
Some mutual funds, commonly referred to as no-load funds, don't impose a sales charge or front-end load. All the money you invest with the fund goes to purchasing shares of the mutual fund. For example, if ABC mutual fund is a no-load fund and you invest $5,000 with the fund, you pay no front-end load, so all the $5,000 is available to purchase shares of the mutual fund.
Just because a fund does not charge a front-end load, doesn't mean there are no costs associated with owning that fund. Both load and no-load mutual fund companies might also charge a purchase fee, management fees, redemption fees, exchange fees, distribution fees, service fees, fees for legal services, transfer fees and a plethora of other fees and expenses. You should always compare the total cost of owning a mutual fund before making an investment. The bottom line might not be how much it costs to buy shares of a mutual fund, but what kind of results the mutual fund produces.
- Securities and Exchange Commission: Mutual Funds
- Securities and Exchange Commission: Invest Wisely: An Introduction to Mutual Funds
- American Association of Individual Investors: What's The Advantage to Investing in No-Load Mutual Funds or Low-Load Mutual Funds?
- American Association of Individual Investors: How Do I Distinguish a Low-Load Mutual Fund From a Load Mutual Fund?
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.