The advantage in mutual funds over a single company stock purchase is that you have instant portfolio diversity. The disadvantage is that the diversity can be so great that you end up with the highs and lows balancing each other out and giving you a lower yield. In addition, funds have managers and the fund investors pay those managers. That’s you. These are the management fees, but wait there’s more. In addition to this fee, they usually charge a fee for advertising and public relations also known as the 12b-1 fee.

Mutual funds have been the sweetheart for the small investor for years, but that’s changing. In addition to buying the fund manager his pent house apartment and new Rolls, you also get to pay all that capital gains tax when securities are sold and fund managers do like to sell. In fact, some managers turn over 100% of their securities in a year and pass on the capital gains taxes to you.

I personally wouldn’t own a mutual fund now that there are better performing funds out there that have low maintenance costs. There is one exception to this and that would be a no load index mutual fund. (Don’t worry about the terms we’ll get to them later.) I might drop some dollars there, but not before I shopped around. I suggest you do the same. There’s some good stuff out there baby.

The types of mutual funds available on the market include closed-end funds, open-end funds, load funds, and no load funds.

Closed-end funds have a limited number of shares and sell in the stock market like any other corporate stock. Closed-end funds usually invest in a particular sector, industry, or country.

Open-end funds issue and redeem shares on a continuous basis. Shareholders buy shares at net asset value (NAV) and redeem them at current market price. (NAV simply means the price is based on the market price of securities held in a portfolio.)

No load funds – These are funds where there is no commission to purchase the fund. You buy these from a bank, trust companies, some insurance companies, and some independent fund companies.

Front-end load funds – These funds charge a commission when you purchase the fund. For instance if you invest $10,000 in a fund with a 2% front-end load, you’re going to pay $200 to buy the fund which will leave you with $9,800 to buy shares of the fund.

Back-end load funds – These work the same way as front-end load funds except you pay when you sell their share.

Level load funds – These funds charge no front or back load, but they charge a hefty 12b-1 fee year after year after year after year ad infinitum.

Mutual funds are classed as A, B, or C depending on their loads.

A Class – These are front-end loaded funds. The 12b-1 fees are restricted to .25% each year

B Class – These are Back-end loaded funds. This charge may be reduced by the fund depending on how long you stay with it.

C Class - I personally think these are the suckiest of sucky funds. They don’t charge front or back loads that make them sound really good. But, like colorectal surgeons, they get you in the end, because they charge high maintenance fees, like forever.