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What does Front Load, Back Load, and No Load mean when it comes to Mutual Funds? - YouTube
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Hi, this is Anne with Finance on the Offense,聽
and today I'm going to go over what front-load,聽聽
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back-load, level load, and no-load mean, when it聽
comes to mutual funds, and also how to recognize聽聽
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them. And I do want to mention that I'm not a聽
finance professional or anything like that. So聽聽
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everything in this video is just for entertainment聽
purposes only. All right, let's get started.聽聽
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Now, first off, when it comes to mutual funds,聽
load means fee. Now, these are not the only聽聽
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fees that mutual funds charge, but sometimes聽
they're the biggest fee. For example, here's聽聽
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a mutual fund that charges 5.75% on everything聽
that you invest into it right off the top. And聽聽
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that example that I just showed you is the first聽
mutual fund that I want to talk about today,聽聽
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which is a front-load or front-end load聽
mutual fund. Now, generally speaking,聽聽
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load funds are sold to you by a financial advisor,聽
because they get paid commission on these sales.聽聽
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It's in the financial advisor's best聽
interest to sell you a high fee fund,聽聽
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and that means it's not in your best interest. So聽
let's just take a little closer look at the fund聽聽
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that I just showed you on morningstar.com,聽
which is the site that I use to research聽聽
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all the mutual funds that I invest in. This fund聽
is called American Funds Growth Fund of America A,聽聽
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and the ticker symbol is this right here, AGTHX. A聽
front-load mutual fund means that whenever you buy聽聽
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or invest in this type of mutual fund every聽
month, they will take a big fee on whatever you聽聽
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put in or whatever you invest. If we come over聽
here to the price, we can see this front-load聽聽
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right here. On this mutual fund, the front-load聽
is 5.75%. So let's say you want to invest $1,000 a聽聽
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month into this mutual fund. You'll pay this load,聽
or the fee on that $1,000 every time you invest聽聽
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it. So basically, if the load is 5.75%, like this聽
one, you'll be losing $57.50 right off the top,聽聽
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every single month. So instead of actually聽
investing $1,000 a month in this fund, now聽聽
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you're only investing $942.50 a month. Not cool.聽
If you're doing some research on mutual funds,聽聽
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an easy way to tell a front-load fund, just聽
from looking at it is this letter A right here.聽聽
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So the mutual fund name will have the聽
letter A in it somewhere usually at the end.聽聽
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And this means that it's a Class A shares mutual聽
fund. Class A means that it carries a front load聽聽
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to pay the advisor sales commission. So while聽
you're searching for the best mutual fund for you,聽聽
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just make sure to notice whether there's an A in聽
the title of it or not. Now, this doesn't apply聽聽
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to stocks. This is just mutual funds I'm talking聽
about. So if you see the letter A in a stock name,聽聽
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that is a completely different meaning. The second聽
type of mutual fund that I'm going to talk about聽聽
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today is a back- load mutual fund, and that's聽
sometimes called a back-end load or a deferred聽聽
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load mutual fund. Now, I actually couldn't find聽
an example of a back-end mutual fund to show you,聽聽
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but basically you pay the load or the fee at聽
the end when you sell the shares. So you'll be聽聽
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paying on however much you put in plus the聽
gains. And these are sometimes referred to聽聽
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as deferred load mutual funds because over time,聽
the longer you keep the money in the mutual fund,聽聽
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that deferred load decreases, so maybe it starts聽
out at 4%. And if you keep your money in there for聽聽
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a couple years, it goes down to 3% or something聽
like that. Either way, these funds are a terrible聽聽
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investing decision. They're so unpopular right聽
now and seen as a rip off for investors that most聽聽
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mutual fund companies have pulled them from their聽
list of available mutual funds you can invest in.聽聽
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And I think that's why it was really hard for聽
me to actually find a back-end load mutual fund.聽
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Also, just so you know, these mutual funds are聽
referred to as B shares. So the first ones we聽聽
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looked at are A shares, and they have A somewhere聽
in the title. These will have the letter B in the聽聽
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title. And as I said before about stocks, having聽
the letter B in a stock name is a completely聽聽
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different thing than having the letter B in a聽
mutual fund name. It's not necessarily a bad聽聽
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thing for stocks. The third type of mutual fund聽
is the level-load mutual fund. And as you might聽聽
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have guessed, these have the letter C in the聽
title. A level load isn't charged when you buy聽聽
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the mutual fund or when you sell the mutual fund.聽
It's an ongoing fee throughout the time you hold聽聽
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the mutual fund. Usually with a level-load fund,聽
the fees are like 1%, and that goes to the mutual聽聽
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fund company. Here's an example of a level-load聽
mutual fund, and we know this is a level load聽聽
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fund because it has a letter C in the title here.聽
And then if we click on price right down here,聽聽
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we can see this aggressive allocation level load聽
is 1.78%. So you're probably wondering, well,聽聽
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if the fees are this high, does it even make sense聽
to invest in mutual funds? But here's the thing.聽聽
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There are tons and tons of no-load mutual funds.聽
And better yet, there's something called a no-load聽聽
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index fund. Actually, all index funds that I聽
know of are no-load index funds. Index funds聽聽
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have super low fees and no load at all. So聽
I pretty much only buy index funds these聽聽
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days. Some of my favorites are VTSAX, which is聽
Vanguard Total Stock Market Index Fund, SWTSX,聽聽
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which is Schwab's version of that same thing聽
as Schwab Total Stock Market Index Fund.聽聽
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And then there is SWPPX, which is a index that聽
follows S&P 500. Now, you might think that these聽聽
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load mutual funds outperform the index funds I was聽
just mentioning. And that must be why you have to聽聽
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pay the fee. So let's test it. Let's head over聽
to a mutual fund comparison site. Now, I pretty聽聽
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much found the mutual funds that I included in聽
this video at random. They're basically just the聽聽
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first ones I came across. So I plugged these into聽
this marketwatch.com mutual fund comparison tool.聽聽
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We've got the Franklin mutual funds here, the聽
American front-load fund here, and then the聽聽
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index fund here. So when we look at the long term聽
annualized return for holding your investments for聽聽
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10 years in these funds, you'll see that the聽
level load shares, the Franklin Mutual Fund聽聽
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only pulled in 8.63%. Not great. The American聽
front-load fund performed the best at 17.76%. And聽聽
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then the very low fee index fund was just behind聽
that as 16.39%. So on the Franklin mutual fund,聽聽
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the the fees were a lot higher than the index聽
fund, and it returned like about half of what the聽聽
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index fund did. The American Fund, which has the聽
big front-end load of 5.75% returned a little bit聽聽
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more than the index fund, but it's not enough to聽
warrant how much we had to pay to invest in this聽聽
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company if we were to do that. All right, if you聽
liked this video and you want to see more videos聽聽
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like this, just hit the subscribe button and the聽
little bell next to it and you'll be notified聽聽
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every time a new video comes out. All right,聽
I'll see you in the next video. Thank you!!!
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