For those looking to stretch their investment dollars as far as they will possibly go, no-load mutual funds can be the way to go. They offer professional management without the sales and commissions load funds charge. However, those investing in no-load funds will need to do so without the professional advice offered to those investing in load funds and thus have to do more homework before investing. By understanding exactly what a load is, the kinds of fees and expenses that are charged and what to look out for, people can make the right choices and greatly increase the value of their investments over time.
A no-load mutual fund is basically a mutual fund that can be bought and sold without any commission or sales charge. This is possible since they are purchased directly by the investor without going through any type of a middleman such as an investment advisor or broker.
Loads are basically sales charges. Investors purchasing this type of fund will have loads charged when the funds are purchased (front end) or sold (back end) and sometimes on an annual basis depending on whether the shares are classified as A, B or C. The structure can be confusing (perhaps deliberately so), and those purchasing them need to be sure they are buying the type that is likely to charge the lowest total load for the type of investing they are doing.
Advantages of no-load funds
Since commissions are not taken out of the net investment when the fund is purchased, there is more money working for the investor. When one considers that the record of performance between the load and no-load funds are similar, most investors can earn a better rate of return if the select the right no-load fund.
Disadvantages of no-load funds
Many investors do not feel they have the time or experience to pick the right funds on their own. They may also desire the personal service and advice their investment advisor might offer. Be it these reasons or just habit, load funds remain popular.
Fees and expenses
Being professionally managed, even no-load funds must have fees. These fees, known as expense ratios, are levied directly against a fund’s assets regularly. Comparing annual expense ratios can be a great way to narrow down the list of funds one might be considering investing in. While they will almost always amount to less than what load funds charge, those buying no-load funds still need to be careful to check and compare the expense ratios of the funds they are considering.
100 percent no-load When looking at the expense ratio, some funds will have a 12b-1 fee. This fee is used to pay for marketing the fund. What many call a true no-load fund will not have this type of fee. While some argue that charging such fees can help the fund and thus the investors over time, there is no evidence that funds which charge 12b-1 fees outperform those which do not enough to justify the extra expense.
Finding the best no-load mutual funds
Since no-load mutual funds are purchased without the advice of a broker, it is necessary to do some research before purchasing. Keep in mind that mutual funds are often held for a longer periods and even relatively small expense and performance differences can add up to a tidy sum of money over time. Morningstar is the top research and rating agency for mutual funds and can be an invaluable resource along with other online guides. Personal finance magazines such as Kiplinger’s Personal Finance also offer great information and advice. The different funds’ expense ratios, ratings, performance over extended periods (3, 5 and 10 years), asset types, level of risk and anything else important to the investor should be carefully evaluated before making any purchases.
These funds, often called ETFs or exchange traded funds, will offer even lower expenses than no-load mutual funds. Designed only to track a certain market or index, they require little management and thus can be maintained very cheaply. They are also more liquid than mutual funds and can be bought and sold like stocks. For many investors, they offer a better way to purchase securities cheaply and with diversity than mutual funds do. For a comparison between these two types of investments, see ETF’s vs. mutual funds.