Buying a load fund? Read this first

If your financial adviser or broker earns commissions, you'll undoubtedly be steered toward "load" mutual funds, which compensate him or her from the money you've invested. For instance, if a mutual fund charges a 5 percent load up front-which isn't unusual for a load fund-your initial $10,000 investment will actually be $9,500. With no-load funds, on the other hand, every dollar of your investment goes to work for you immediately. You buy no-loads directly from the investment company, through an adviser who works on a fee basis, or through a mutual fund "supermarket" like Charles Schwab's Mutual Fund OneSource.

While most serious investors favor no-loads for their lower initial costs, there are certainly some top-notch load funds worth investing in-and plenty of honest, hard-working advisers who are compensated solely, or in part, through commissions. That said, not all load funds are alike. Here's a rundown of the types of loads you're most likely to face as an individual investor:

Front-end or initial load (Class A fund shares): Mutual funds that charge front-end loads do so in the form of Class A shares. The tab can run from 1 percent to 8.5 percent, depending on the particular fund, and comes out of your initial investment. While that might be hard to swallow, it's usually more advantageous to take your lumps up front if you're a long-term investor. That's because other share classes often have higher annual expenses for staff salaries, shareholder services, and other operations. (These are reflected in the fund's expense ratio, which doesn't factor in loads.) Over time those higher expenses could bite into your returns a lot deeper than the combination of a higher up-front load and lower expenses would.

Deferred loads sound like a better deal than front-end loads, but B shares are among those that typically carry higher annual expenses than A shares. To use an example, the annual expenses for the B shares of Oppenheimer Discovery Fund, a small-company growth fund, are 2.1 percent vs 1.3 percent for the A shares.

For one physician, who had $110,000 invested with a single fund company, owning B shares cost $1,375 more than the A shares would have over the time he owned the fund, recalls Joel S. Greenwald, a fee-based financial planner with Affiance Financial in Minnetonka, MN.

Level load (C shares): With C shares, you'll pay a low or "discounted" load, but you'll also pay an annual sales fee that can run as high as 1 percent of assets. Moreover, C shares usually don't convert to A shares, so there's no hope of ever enjoying a lower expense ratio. That makes them a lousy deal for long-term investors. C shares make sense only if you plan to cash out in five years or less, Greenwald says. Otherwise, stick to A shares.

Service fees: Previously known as "trailing commissions," these fees are buried within the fund's 12b-1 charges, which are meant to cover some of the fund's promotion expenses: advertising, marketing, and distribution. Service fees are used to compensate your broker for giving you advice and answering your questions. Yes, in theory, that's what the load was for: his commission. Nevertheless, service fees and other 12b-1 charges are in addition to the load and are figured into the fund's total expense ratio.

Service fees aren't exclusive to load funds, however. NASD rules also allow no-loads to charge a service fee of up to 0.25 percent of the assets invested.