No-Load Mutual Funds vs. Load Mutual Funds
September 26, 2013
A no-load vs. load mutual fund, which is better? This 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 the charge goes to pay their commission. The difference between the two is this:
No-Load = Choose Mutual Funds 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 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 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. 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 six and seven 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.
What are your favorite types of mutual funds? Leave a comment!
This article was originally published on June 15th, 2011.
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