No-Load Mutual Funds – A Comprehensive Overview
You have two options when buying mutual funds: load funds and no-load funds. Your choice will come with certain implications, including incurred transaction costs and charges. Following is a comprehensive insight into how no load mutual funds work and a brief comparison with load funds.
Load Funds
A load fund is a mutual fund that comes with a commission or sales charge attached as the “load.” Charges are attached on account of utilizing the services of a sales intermediary, such as a broker or investment advisor. To this end, the incurred charges are the sales intermediary’s service fees.
Advantages
As mentioned, buying a load fund is facilitated by a sales intermediary, who essentially is a professional in the finance industry. In addition to processing the transaction, the sales intermediary also offers informed professional advice, ideally identifying the most lucrative mutual funds. This is the most significant advantage of a load fund.
Sales intermediaries are intimately familiar with the finance markets. They have the latest insights into noteworthy developments in the industry, including information about the best and worst mutual funds. Ordinary speculative investors may not have these insights and professional understanding, which essentially makes them incapable of making fully informed investment decisions.
The complimentary professional investment advice that comes with load funds helps investors make the best decisions. The professionals do the research and analysis and provide detailed reports with their recommendations. This saves investors time and offers them some assurance on their mutual fund investment choices.
P.S. A sales intermediary’s accuracy in making recommendations depends on their expertise and competence. As such, you should be very selective of the intermediary you consult. Experts also recommend following up on the advisor’s report and counter-checking the numbers to make sure that they add up.
Disadvantages
The main disadvantage of a load fund is the attached charges and commissions. These charges can be substantial, depending on the size and type of investment, and other factors. The costs diminish your investing power as they are deducted from your investment funds. For example, if you are buying mutual funds worth $1,000 and get a 5% load, the actual amount invested will be $950.
Fortunately, investors have a range of flexible options when it comes to paying the loan. The three options are:
- Paying upfront for a front-end load.
- Paying after finalizing the transaction for a back-end load.
- Paying at your set times for as long as the mutual fund is under your possession for level loads.
However, your payment plan may be influenced by your chosen mutual fund’s class share. The charges are payable to your sales intermediary unless agreed otherwise in the contract.
No-Load Funds
A no-load fund does not come with the charges and commissions levied on load funds. It also doesn’t involve a professional’s services – instead, the buyer purchases his/her desired mutual fund directly from the investment company. This is also the reason behind the absence of charges.
Advantages
There are two main advantages of investing in no load mutual funds:
- Maximum Investment Capital
As mentioned, no-load funds don’t have attached charges or commissions. This means that no money is deducted from their original investment funds, and so they have their maximum investment capital at their disposal.
Consider the earlier example of an investor investing $1,000 in a load fund, whereby he/she ends up with $500 less than the initial investment fund after a 5% load charge. In this case, nothing will be deducted from the $1,000, so it will all go into the investment.
- Avoiding Fraudulent Investment Advisors
As mentioned earlier, an investment advisor’s recommendations are not always correct. Their accuracy depends primarily on their expertise and competence. Unfortunately, many incompetent hacks are posing as professional financial experts, including investment advisors. These hacks are often just as clueless and the masses.
There will be no need to solicit an investment advisor’s services when buying a no-load fund. This means that you will not fall victim to fraudsters giving uninformed and inaccurate recommendations.
Disadvantages
Don’t let the hacks masquerading as professional financial experts make you lose confidence in the industry – indeed, there are many professionals with spot-on recommendations. Unfortunately, this is not an option when buying no load mutual funds, as mentioned. Everything is up to you, from the initial research to analysis and decision-making.
Lack of professional guidance can be a big disadvantage, depending on your expertise in investing in mutual funds. To this end, this option is mostly recommendable for professional or experienced investors. Experts also recommend doing a thorough research and backing it up with comprehensive analysis before making your final decision.
Fees in No-Load Mutual Funds
The fact that no-load funds are not charged for the sales intermediary’s fees does not mean that the transaction is free. On the contrary, every purchase of mutual funds carries fees.
No-load funds are charged for 12b-1 fees, and they are especially common in Class B shares, Class C shares, Class R shares, and load-waived funds. The Financial Industry Regulation Authority (FINRA) caps 12b-1 charges at 1% per year.
For no load mutual funds, the fees charged are based on your investment fund’s expense ratio. Expense ratios are a portion of the fund’s total assets under management, and the money is used to cater for administrative costs incurred when operating the mutual fund.
The amount charged varies depending on the mutual fund’s nature and your desired investment amount, among others. However, the charges can be as much as 5% less the costs of a load fund. Additionally, these fees are deducted from profits gained on the mutual fund, which means that you will not be paying out of your pocket or tap into your initial investment fund.
Make an Informed & Profitable Investment Decision
Understanding the difference between load funds and no load mutual funds is a major first step towards making an informed decision. For example, you know that investing in a load fund will cost you extra fees and charges, but you will also benefit from professional investment recommendations.
However, there is still more you need to know to make expert decisions. That is what we are here for! Bogart Wealth is an expert in mutual fund investments, and we have a lot of expert insights to share. Get in touch today to learn more about how we can help you pick the ideal mutual fund investment.