The initial and deferred sales fees make up what are commonly referred to as loads.
A load is a percentage the fund company charges you either when you invest the money, initial sales fee, or when you sell your investment, deferred sales fee. It is taken directly out of your investment. Thus if you are investing $10,000 and the initial sales fee is 2%, then $200 is taken for the fee and only $9,800 gets invested into the mutual fund.
A deferred sales fee is also a percentage of the money, but it is taken out when you make a withdrawal from your mutual fund. This one is not as straight forward as an initial fee, because there are many ways to calculate the fee. Some companies do it based on your initial amount, some do it based on the amount at withdrawal, and some actually reduce the fee over time.
This reduction is known as a contingent deferred sales load or CDSC. You will want to read the prospectus carefully if you see the fund has a deferred sales fee. This is the only way you can tell exactly how it is calculated.
The biggest benefit of paying a load on a mutual fund is that you typically get lower annual fees. Thus after you recoup the costs of the initial load, the fund has to make less each year in order to beat the market. If you are buying and plan on staying for many years in the same fund, this might be a good alternative.
Short answer – no! Most mutual funds that have a load are sold by investment advisors, as a way for them to get paid. The only way I would consider a load fund is if I was not paying my planner in any other way. However, that is a really bad way to hire a financial planner, as they will not be looking at all your needs and instead they will search for investments where they get paid. You are better off with a planner that is fee only or a flat fee instead of them getting paid by what they sell.
There you go a run down on load mutual funds! Now for an action step: go look at your existing funds and review the fees, specifically if you have a deferred load. If you do this will allow you to prepare for that and know the rules. If you don’t have any loads, congrats one less thing to worry about today! (How to review mutual fund fees)