Mutual funds come in two major types, load and no-load funds. A load fund charges a percentage of the investment, usually when you purchase shares, and pays this percentage to a broker who sold the fund. A no-load fund does not charge this fee. While you invest less principal because of the load in a loaded fund, no-load funds are not automatically a better deal.
If you use a financial professional to help you invest, his advice will come at a cost. Some advisers charge by the hour, while others are paid based on a commission, as with a loaded fund. If you pay an adviser for two hours of services at $100 per hour to invest $5,000 in a no load fund, it is the same as paying a 4 percent load on the same investment, with the broker being paid the commission. If you do not need professional advice, a no-load fund may have the advantage.
You may choose to invest in mutual funds of certain sectors such as healthcare or technology. A fund you wish to invest in may only be available with a load. If you need this fund to complete your portfolio, it may be worth paying the sales load, particularly if you cannot find a no-load equivalent.
Mutual funds incur expenses from the salaries they pay their managers and staff, as well as expenses related to trading securities in a fund. Investors must carefully review the expense profile of the funds they are considering, as funds with higher expense ratios can reduce investment returns. A loaded fund with a lower expense ratio may be a better overall investment than a no-load fund with higher expenses.
Mutual funds are allowed to collect a fee for marketing and selling their fund to new investors, called a 12b-1 fees. According to Securities and Exchange Commission rules, a no-load fund can charge up to 0.25 percent of your balance in 12b-1 fees and a loaded fund can charge up to 1 percent.
A purchase fee is similar to a load, since you pay it at the time you buy a mutual fund. However, a load is paid to a broker as a commission for selling the fund, and a purchase fee is paid to the mutual fund itself to defray the expenses related to your purchase of shares.