No Load Mutual Funds Guide

So you’ve done some research; asked around, looked around, listened around, and you have come to the conclusion that what you need is a mutual fund. You first began by thinking that you wanted to buy stock, but after careful consideration decided that maybe a mutual fund, where you could buy a group of stocks all in the name of being more diverse, would be a better option. You were just about ready to pick the perfect fund, until you ran into what obstacle. What is the difference between no load mutual funds and load mutual funds?

The Two Types of Mutual Fund

Well, one is a ‘load’ and the other is a ‘no load’. I know, I know. How vague. With a load fund you are essentially paying for the advice and expertise of an advisor or a broker. They of course aren’t doing this work for free, but taking a commission for their efforts. With no load mutual funds, however, you are buying stock directly from the investment company, and doing so without the help from these experts. I would in a sense equate this to the difference between selling your home in the ‘for sale by owner’ fashion, versus using a realtor. In the former you will be able to avoid certain fees associated with selling a home (or stock), but of course will be doing so without the advice and expertise of someone who presumably knows the field very well.

Avoid the Fees of the Load Fund

By way of example, if you were to invest $10,000 into a load fund, you might be charged 5% for their services ($500), so you will really only invest $9,500 into the fund. To give you an idea of what that could mean, if you were to have a 10% year in the market, your $9,500 would grow to $10,450, instead of the $11,000 that it would have grown to with no fee. Although you paid $500 in fees, you are now behind $550 from where you could have been! This is the power of compounding interest, and it will only grow to be worse as time goes on.

Funds can be back loaded as well, where the $500 fee might not come out in the beginning, but come out of your profits when you withdraw. In my personal, humble opinion that is a preferential place to pull a fee from, as opposed to the front load example from above. It is also important to note that there is also a level load fund, where you are charged a percentage of the amount you have in the fund, for as long as you are invested. If this fee were 1%, you would pay $100 in this first year, and continue to pay 1% for the life of the investment.

Which Type of Fund is Better?

You didn’t actually expect for a concrete answer to that question, did you? Of course, as with most things, there are pros and cons to load mutual funds and no load mutual funds. Traditionally no load mutual funds have outperformed their counterparts, but that isn’t always the case. One of the biggest benefits to investing in a load mutual fund is the fact that you do have that guidance and expertise from an advisor or broker, who might have some insight into different parts of the stock market that you do not. He might be privy to what other investors are doing, and simply might have a better grasp on what a good investment might be for you and your particular situation. In the end, you have to decide what is best for you.

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