A load is a heavy burden on your investment

A mutual fund that charges a commission is called a "load fund." Load is another word for sales commission or sales fee. You usually pay this commission to a financial planner or stockbroker for helping you select the fund for your portfolio.

Front-end and back-end loads are the most common.

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Front-end load

A typical front-end sales commission is about 5 percent -- you pay it when you buy the mutual fund. If you write out a check for $10,000 and the sales commission is 5 percent, $500 goes into the salesperson's pocket. That makes your actual investment $9,500. Your investment has to earn 5.26 percent to get you back to your initial $10,000. This isn't going to have much of an impact if you hold the fund for 20 years, but if you decide to sell it within a couple of years, it's going to hurt your return.

Back-end load

A back-end load fund hits you with a penalty if you sell your mutual fund too soon -- usually within six years of the purchase. Back-end load funds are often classified as "B" funds. Because nothing is coming off the top when you buy, this kind of fund is sometimes dishonestly referred to as a no-load. The salesman gets his commission in other ways -- you get to pick up the tab with the higher annual fees allocated to your fund. A true no-load fund has no front-end or back-end load and cannot spend more than .25 percent of your fund assets on marketing.

The back-end load typically starts at 6 percent if you sell your shares in the first year and gets reduced by 1 percent each year you hold the shares thereafter. Your penalty would be 2 percent if you sold your shares in year 5 and 1 percent in year 6.

Load-fund vs. no-load fund

The Diva prefers to have all of her investment dollars working for her -- she likes no-load funds. A well-informed investor can pick his own mutual funds. Visit our archives for stories on mutual funds, do your research, and when you find a fund you're interested in, call or visit its Web site for a prospectus.

Some of the things you'll find in the prospectus are:

Fund's objective -- if it's a stock fund, is it seeking growth, income or both. Is it investing in large companies or small?
Fund's holdings -- what are the top 10 companies the fund is investing in? What industries are represented in the fund? Do you feel comfortable with the mix?
Expense ratio -- even if the fund has no front or back load, it will have other expenses, and these expenses will reduce the return on your investment. The expenses include management fees, overhead and 12b-1 fees (sales commissions, advertising and marketing). The expense ratio should hover around 1 percent, while 1.5 percent is very high, and more than 2 percent is exorbitant.
Performance -- how the fund has performed in relation to its index. If the fund you're looking at consistently under performs the index, pass it by. The Diva's December 1999 column, "You'll need an index to do the job," explains how to measure a mutual fund's performance against the appropriate index.