“No load vs load mutual fund, which is better?”, was a reader question that came in through the contact form a while back. 

A “No-Load” mutual fund is one in which the investment company sells it directly to the public. A mutual fund with a “Load” is one in which the investment company sells the fund through a third party, which adds on a sales charge. That “party” is your financial professional and charge goes to pay their commission. The difference between the two is this:

No Load = Choose it Yourself

That’s not exactly a bad thing. If an investor has the time, the knowledge and the ability to choose their own funds, they can save on fees/commissions that normally go to the financial professional. Since they’re not paying a fee, they don’t need as high of a return as a load fund would to make the same amount of money.

Load Fund Fees

When you purchase a “Load” fund, you are paying that professional for their time, knowledge and discretion in choosing mutual funds for your portfolio. Some investors do not want to pick out their own mutual funds and rely on professionals to do so.

There are different types of fee structures, the share class of the fund signifies how the investor pays their fee and how a financial professional receives their commission. The investments in the underlying mutual fund are exactly the same regardless of share class. It is extremely important that an investor know the differences in these share classes before making any final investment decisions.

Note: All fees and/or commissions mentioned below refer specifically to the individual investment. You may have other account fees, etc. Also please keep in mind, that placing trades may cause taxable events, those are not being discussed here.

Fund Share Classes

Class A Shares

Class A shares are “Front-End” loaded shares. This means the investor pays the commission up front, which is usually 5%. If you purchase $1,000 of a mutual fund, $950 is what actually gets invested. The financial professional usually receives a commission up front and a small “trail” starting at month 13.

Class B Shares

Class B shares are “Back-End” loaded shares. The investor does not pay any commissions up front. They pay when they sell. How much they pay is based on how long they held the fund. It usually takes 7 years to clear all back-end fees.

Although the investor pays on the back-end, the financial professional receives their commission up front with a small trail. This can set up a difficult situation where the investor is locked into a fund that either isn’t performing or suitable, but can not do anything because of the back-end charge. The financial professional has already been paid and may not have the same attention since that investor is basically stuck.

Class C Shares

Class C shares are “Level-Load” shares. The investor does not pay upfront or on the back-end. Every penny put in is invested. The difference is that the internal expenses of the fund will be slightly higher than the Class A share, so the net performance will be slightly different. The professional receives a smaller commission than the A or B shares, but gets a higher trail. As the fund goes, so does the professional’s income.

Comparing Fund Share Classes

When trying to decide whether to use Class A or Class C shares, the break-even point in terms of fees is somewhere between 6-7 years. If you plan on holding for longer than that, then a Class A share might make sense. If you have a shorter timeframe or plan on re-allocating your assets, then “C” shares make more sense. Also keep this in mind. If a fund changes managers, or starts to perform poorly, or your goals and timeframes change, Class C shares make it easier to make adjustments.

So which way should you go? That depends on how you are handling your investments and if you have time to do your own research. One issue you may come up against is the dwindling supply of “no-Loads.” Many companies used to make these available, but more and more over the years, they are moving towards the “Load” side of things.

With the proper due diligence, a strong portfolio can be built using either, or a combination of the two.

Investing in index funds is a pretty basic investing strategy but we wanted to cover it for two reason:

1) There are many people who are not expert investors and need this information.
2) Regardless of how experienced you are, this is a legitimate technique, especially for people who do not have the time or resources to monitor their own portfolios.

What Are Index Funds?

Index mutual funds are funds that mirror a specific “index.” For example, an S&P 500 Index Fund consists of the 500 individual stocks and their weightings in the index itself. If you invest in the fund and check the financials, whatever happens to the index in terms of performance, happens to your fund.

Index Fund Benefits

Index funds are “passively managed.” This means that compared to other mutual funds where portfolio managers make decisions on when to buy and sell holdings, a passively managed fund can only make investment changes when the index itself changes. Index funds have very low turnover rates because the indexes do not change all that often.

This makes this type of investment more tax efficient than actively managed funds. Index funds also have much lower expenses than actively managed funds. Index funds typically have 0.1%-0.35% in management expenses compared to 1%-2.5% for actively managed funds.

Index Fund Returns

Now some of you will say the goal is not to get index-like returns. The goal is to beat them. What most people don’t realize is that roughly two-thirds of all actively managed mutual funds fail to match the investment returns of index funds.

Index Fund Examples

So how do you use this information? What kind of funds should you use for a portfolio? Here are some examples of index funds you could use in your portfolio:

Vanguard Total Stock Market Index (VTSMX) – This fund is more than just the S&P 500 index. This fund encompasses the entire US stock market. This will give an investor exposure in both mid-cap & small-cap funds as well.

Vanguard Total International Stock Index (VGTSX) – Full international exposure in one fund.

Vanguard Total Bond Market Index (VBMFX) – Tracks the Barclays US Aggregate Bond Index, gives exposure to the bond market.

Vanguard Intermediate-Term Tax Exempt (VWITX) – This fund invests in high-quality municipal bonds, and is a good option for taxable accounts.

These funds could also be used as a starting point for people who want to combine index funds with other investments. Like any other investment though, these index funds should be treated as long-term investments.

Morningstar is a good place for mutual fund research that offers investors more information than simply fund performance. Morningstar is known for its unbiased reporting and analysis and it has a tremendous amount of free information available. It does have a premium service that offers fund analyst reports and portfolio analysis tools but everything we’ll talk about today is available for free.

Mutual Fund Research

Important questions to ask about a mutual fund you’re researching are:

• What is the objective of the fund?
• What does the fund invest in?
• What is the Morningstar rating?
• How old is the fund?
• How long has the portfolio manager run the fund?
• What are the expenses of the fund?

To research a mutual fund on Morningstar simply type in the name or ticker symbol of the fund in the Quotes box on the Morningstar site and you’ll be taken to the fund snapshot page. Almost all of the questions listed above can be answered on the fund snapshot page, the rest are just one click away by drilling down from the snapshot page for more detail.

Fund Objective – Mutual funds are listed by their investment style and are also categorized by their investment objective. If, after answering the above questions, an investor has found that they are an aggressive investor, they do not want to invest in a mutual fund that focuses on short term government bonds.

Investment Category - Mutual funds are categorized by the investments they use and where these investments are located. U.S. corporate short-term fixed income funds are different than Pacific Rim technology funds. Many of the most popular funds fall into the category of US Large Cap, which means the fund invests in American companies with large capitalization. These companies are the household names you hear every day.

Morningstar Rating – Morningstar uses a five star rating system where they compare each fund to its peers. They compare apples to apples and not oranges. This helps the individual investor compare funds that are the same category and objective.

Life of Fund/Portfolio Manager Tenure – Past history is all that is available to compare investments. An investor will want to make sure there is a legitimate track record and that the same portfolio manager has run the fund over that period. A five year timeframe is usually a long enough length of time to make any judgments.

Expense Ratio – The more expensive it is to run the fund, the higher the expense ratio. The higher the expense ratio, the more it affects the performance of the fund. A fund that has 3.00% in expenses will have its performance diminished compared to one with lower expenses.

Hopefully answering all of these questions will have helped you narrow your list of mutual funds down to a small handful and now you can look at fund performance to help make your decision. That decision however, is never final. It’s really importance to keep track of the investments and any changes to them. If you don’t have the time or resources to do that, you may want to think about hiring someone to do it for you.

Trying to absorb and process all the information may be a little overwhelming but don’t get discouraged, remember this research is helping you financially prepare for your future. Researching the potential mutual funds is a vital step in investing your money; hopefully this overview will help you feel a little more prepared for the process.

To learn more about the research options available via Morningstar – Click Here.

The best mutual funds is a common headline in many financial magazines, followed by a list of the top mutual funds by performance or the best mutual funds of the year.  While these lists of investments can be helpful when trying to put together a portfolio on your own; one of the biggest mistakes you can make is picking an investment of any kind before you do any due diligence.

This investing research pertains not just to mutual funds but also stocks, bonds, ETFs, etc.  It involves not only researching the investment but more importantly, honest research of yourself. We’ve all seen over the past year the disastrous results an investment decision can have if not properly researched and based on good information.

The following questions need to be answered before you ever type in a ticker symbol on a website or flips through the performance section of Barron’s Magazine:

• What is my time frame?
• What is my risk tolerance?
• What is my objective?

Investing Time Frame

The difference between someone who is saving money to buy a house in 18 months, compared to another who is looking to use the funds for retirement 20 years away changes how an investment should be made. The general standard in the financial industry is that 5 years is considered long term. This timeframe is usually a suitable length of time to ride out any fluctuations in the market. The shorter the time frame from 5 years, the more conservative the investment should be.

Risk Tolerance

This tends to be the most difficult question an individual has to answer. The two biggest enemies to investing are fear and greed, and the both rear their ugly heads when trying to decide what will keep an investor awake at night. It is very easy to say someone is an aggressive investor when the stock market is up 30% in one year. The more important question is “how would you feel if that same investment was down 20% the next year?”

Investing Objective

Is the goal to put money in an investment and let it grow for 20 years or are income the priority? Could it be a combination of the two? Maybe capital preservation is what’s important?

Mutual Fund Research

Once you’ve answered these questions about yourself, you can begin to search for a mutual fund. Be careful where you look for information; there is so much “white noise” and advertising out there, it can be difficult to get an objective opinion.

A person also wants to make sure they are choosing a fund for the right reasons. There’s a saying in the financial industry…”Yesterday’s winners are tomorrow’s losers.” Just because a mutual fund was up 19% last year, it does not mean it is the right investment for everybody. Past performance should actually be one of the last reasons to choose a fund.

Tomorrow we’ll take a look at a resource you can use to find not just investment performance data, but a lot more mutual fund information to help you choose the best mutual funds for your money – Morningstar