If you've know anything about MAXfunds, you know that we think load funds are bad and no-load funds are good. These days, however, determining if you are paying a sales commission when you buy into a mutual fund is more difficult then you may think. There is no boldface text on the application that says "This is a load fund". The load information is hidden in complex fee tables deep in a document most investors don't even glance at, the prospectus.

Mutual funds come in two basic forms: with built in sales commissions (loads) or without (no-loads). Determining which one you are buying can be confusing. Our own informal research has determined most people who own a load fund don't know they paid a sales commission.

The most obvious culprit for the confusion is a fund industry that has purposely created mysterious share classes and fee structures. Obscuring the sales fees paid by the investor (AKA: mark) helps the brokers who sell the funds avoid having to answer uncomfortable questions, and ultimately increases assets under management.

But figuring out if a fund you are interested in comes with a load isn't t that tough. Read below for some warning sings that a fund on your shopping list might come with an unpleasant surprise.

A sales person, accountant, bank employee, broker, advisor, or other "expert" recommends the fund to you

Load funds are generally sold, not bought, meaning somebody on commission is recommending them to get a commission paid by the fund company that comes directly out of your investment. Make sure to read any and all literature associated with a fund your broker is recommending you buy.

Somebody is "affiliated" or on "record" or a "representative" with your account

When you fill out an application for a load fund, often there is the name or code of a salesperson so the fund company knows who to send a check to.

The fund has a letter after the name, like Super Growth Fund "A", "B", or "C"

While there are exceptions to this naming rule, load funds come in various share classes of the same fund, all with a different sales fee structure to deal with different kinds of customers. Traditionally, "A", "B", and "C" share classes are the ones to watch out for, but "Adv" classes can have higher fees to compensate advisors selling the fund to you, and some funds have introduced bizarre classes like "T" or "Y". Note: some letters or letter combinations, like "Inv" or "I" often denote a retail no-load class, or a no-load institutional class available to retirement plan investors.

The fund has a 12b-1 fee of over .25%

While you generally will have to dig into the prospectus to find out this number, the 12b-1 fee is a good indication of whether you are buying a load fund or no-load fund. No-load funds can not call themselves "no-load" if they charge 12b-1 fees in excess of .25%. Most load funds, particularly "B" and "C" class load funds have 1% per year 12b-1 fees on top of the fund management fees that are used to pay commissions to salespeople year in and year out. That's why "B" class mutual funds are often the "gift that keeps on giving" to a broker who sells you on it.

The fund has a total annual expense ratio of over 2%

While there is (sadly) no rule about total expense ratios and load and no-load status, funds with a total expense ratio over 2% per year are generally "B" class load funds, largely because of higher 12b-1 fees (see above). Regardless, you don't want to own any fund, load or no-load, with a total expense ratio of over 2% each year, so it doesn't really matter anyway.

The fund does not mention "no-load" in sales literature

While the broker or planner may mislead you about a fund being "no-front-end-load", your "not having to pay any sales loads out of your money up front" or some other gibberish, any prospectus or literature for a load fund will never say in writing it is a "no-load" fund as the term has certain requirements to be used. Most no-load funds brag about it in their literature, so be suspicious of any fund that doesn't mention it's "no-load" status prominently.

Just ask

"Would the SEC allow you to call this a no-load mutual fund?" to any person or fund company behind a fund you are looking into, this question is sure to get an honest response. There are two reasons we like to word the question this way, 1) The use of the term "SEC" or Securities and Exchange Commission, snaps unscrupulous salespeople out of "closing" mode and into "better watch what I say" mode, and 2) we can't tell you how many times we worded the question "is this a no-load fund" only to get an obtuse response like "the fund is sold without a front-end sales load" which is technically correct if the fund is a "B" or "C" class load fund, but clearly dodges the question at hand.