Returns that investors get from a load fund will actually be less than the returns that are commonly published because of commissions.

Adam Bold

If there were two gasoline stations across the street from each other that both charged the same price per gallon, but one charged an extra 10 cents per gallon for paying with a credit card, would you go to that station? No. The same is true for mutual funds. That’s why investors have to watch out for mutual funds that carry a load, which is a type of commission. Some people believe that load funds must be worth more because investors pay more to own them, but that’s not true. Actually, the load doesn’t go to the fund manager or management company that runs the fund. Instead, the load goes directly to the broker that sold the fund, as his or her incentive for selling you that fund.

Loads are bad for investors mainly because it hurts their ability to earn more money from mutual funds. If a fund carries a 5.75 percent front load, the broker will get $575 for every $10,000 you invest in the fund. That leaves you with just $9,425 to start with. This means you have to earn back the $575 that was paid to the broker just to break even. You also lose the compounding of the load amount as the market rises. That can grow to be a big number over many years, and ultimately cut into your investment returns.

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From the get-go, loads put you behind. In the 1920s, when the first mutual funds were launched, the only funds available were load funds, so investors had no other option. Now there are plenty of great funds that don’t charge a load. It reminds me of when we had to pay a lot for long-distance telephone service from one phone company. Do you remember having to wait until Sunday night to make long-distance calls to grandma and grandpa who live in Florida because that’s the day it cost less?

Now no one thinks about that when they make long-distance calls because those costs are included in our cell phone plans. And if we don’t like our phone plan, we can shop around for one that costs less and sign up with a different service provider. For some reason, people will shop all over to save $10 a month on their cell phone plan, but they don’t even think twice about paying that fat mutual fund load when there are better options available.

Loads can also cause investors to feel trapped in an investment. If you buy a load fund and want to sell it, the broker may want to sell you another load fund, which means you’ll have to pay another commission. Instead of selling it, you might stick with the fund longer than you should. Or you could stay within the same fund family to avoid paying another load, but that limits your choices and chances for finding the best fund.

Another thing that you should know about load funds is their performance numbers do not include the load. When looking at fund performance data on U.S. News ‘s site or Morningstar, those returns are net of fees and expenses that the mutual fund company charges, but they’re not net of the load. In other words, returns that investors get from a load fund will actually be less than the returns commonly published.

What if a load fund has a much better performance record than a no-load fund? Show me that load fund, and I’ll find a similar no-load fund that performs just as well or better.

Granted, many registered investment advisers, including us at The Mutual Fund Store. do use load funds, but we get to buy them with the load waived. This allows us to offer a wider selection of low-cost funds to clients who might not have access to them on their own. The load itself really isn’t bad, but paying the load is bad. Mutual fund companies make money from ongoing management expenses, whether it’s a no-load or load fund.

While some things are worth paying more for, loads are completely unnecessary when it comes to buying a mutual fund. Individual investors should focus on finding the best no-load funds. If you’re searching for funds on your own, look for no load where the fees and expenses are listed on financial websites. (For more on types of loads, and the costs of investing in mutual funds, see our earlier post .)

Adam Bold is the founder of The Mutual Fund Store. which provides fee-only investment advice with locations coast-to-coast. He’s also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.