'Loaded mutual funds' can be described as those that require the investor to pay fees for buying a mutual fund. These charges are known as sales load and are primarily commissions paid to the person who sells the fund to the investor. Loaded mutual funds are preferred mainly by sales brokers and insurance salesmen because they earn revenues for them.
There are three different types of sales loads on these funds. They are as follows:
1. Front-end loads: Also known as entry fees, these charges must be paid up-front when the investor buys the fund.
2. Back-end load: Also known as exit fees, these charges have to be paid by the investor when he walks away from the fund taking his investment along with the returns.
3. Constant load: These charges have to be paid throughout the entire term of the fund.
In all these three options, front-end loads are better for investors. A hidden fact in a loaded fund is that the charges or the sales load is deducted from the actual investment amount. As a result, the net investment value at the start of the fund is lower. For example, when an investor wants to invest $10,000 in a mutual fund and agrees for a 5 percent entry load, he is actually investing $9,500. The remaining amount of $500 is deducted from the total investment and deposited in the form of front-end load. This commission neither goes towards management of fund nor gets the investor any special privileges. It is simply deposited into the bank accounts of the broker or the salesperson. In this regard, loaded funds are disadvantageous when compared to no-load funds.
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