Quora Answer: Are Front Loaded Mutual Funds Worth It?

The following is my answer to a Quora question: “Are front loaded mutual funds worth it?” 

A front loaded mutual fund is simply a fund that charges a one-time fee upon the purchase of shares of the fund.  These are called Class A shares.  This is in contrast to a back loaded mutual fund, Class B shares, which charge a one-time fee paid upon redemption of the shares of the fund.  Then, there are also level loaded funds, Class C shares, which charge annual fees as a fixed percentage of the fund’s assets under management. 

Finally, there are so-called no load mutual funds, which have no such fees.  That does not mean, however, that there are absolutely no fees.  There are a lot of creative ways to put in hidden charges, which are not apparent unless you do a close reading of the prospectus.  The people who manage the fund need to be paid, and all that infrastructure costs money to maintain. 

Generally, I prefer front loaded mutual funds.  When we buy into the find, it is with the hope and the anticipation that the value of our holdings will rise.  We buy in on the low, as far as possible.  That one-time fee is on the cost of the purchase of shares.  When the fund increases in value, what we make easily covers the cost of the initial purchase. 

Level load funds are annual charges, a recurring cost.  This means, over time, you have paid more in fees than for the front loaded fund.  It penalises you for having an extended investment horizon.  Back loaded funds charge you upon your exit.  Assuming you have done this right, your investments would have grown in value.  Over an extended investment horizon, due to the power of compounding, this could be many times the principal invested.  This makes the quantum paid much more expensive than for a front loaded fund, even if the percentage cost is lower.