46% of all US households have an investment in a mutual fund. In fact, that’s a whopping 102.5 million people who’ve chosen mutual funds as an avenue to grow their money and plan for the future.
What makes mutual funds so popular? Do all these millions of people have in-depth knowledge of investing?
Most importantly, how do they decide what mutual fund to invest in? With so many options and ways to actually buy into a mutual fund, this does require some investor knowledge.
For example, what’s the difference between a load and a no-load mutual fund? Why would an investor choose one option over another?
Read on to learn more about mutual funds and the key differences between load and no-load options.
What Is a Mutual Fund?
There’s a reason mutual funds are so popular for Americans. In fact, a large number of employer-sponsored retirement plans actually invest in mutual funds.
So, what is a mutual fund, exactly? A mutual fund is a type of investment where you pool your money with other investors. The money is then used to invest in a portfolio of stocks, bonds, or other securities.
Instead of buying one particular stock in a company, your money goes into a diversified account. As an individual, you might not be able to handle buying stocks, bonds, and securities on your own. Yet, when investing with others in the mutual fund you can.
How Does Investing in a Mutual Fund Work?
A mutual fund is actually a business you invest in it. When you buy stock in Microsoft, for example, your share of stock means you own a tiny piece of the company. When you put your money into a mutual fund, you own a piece of the overall fund.
So how does the mutual fund make you money or grow your money? There are several ways you can make money when investing in a mutual fund.
First, the mutual fund might hold stocks and interest on bonds as part of the overall portfolio. You might be paid dividends from those.
A mutual fund will also pay out most of its profits to investors with dividends. Your dividend amount will be based on how much you have invested in the mutual fund.
The fund manager might sell a security that’s part of the fund portfolio and pass the capital gains onto investors.
Now that you understand some about mutual funds, let’s consider load and no-load funds and how they compare.
How Are Load Mutual Funds Different From No-load Mutual Funds?
Here’s the information you requested in a table format:
|Load Mutual Fund||No-Load Mutual Fund|
|Fees||Front-end, back-end, or level-load fees charged||No sales commissions or loads|
|Use of Financial Advisor||Requires a financial advisor who charges fees||Invest directly without an advisor|
|Expenses||Higher expense ratio due to advisor fees||Lower expense ratio without advisor fees|
|Control||Less control over investments||More control over investments|
What Are Load Mutual Funds?
A load mutual fund is one you purchase through your financial advisor and they have a fee, sales charge, or commission attached to the purchase.
You’re paying the extra fee or commission to the financial advisor or intermediary who has helped you to select the right mutual fund for you. The load or fees are what you’re paying for their expertise.
You may pay a front-end charge which would mean you’d pay when you invest in it. You might also pay a back-end charge that you’d pay when you sold from the mutual fund.
You might also pay a level-load fee which is typically a flat fee paid yearly to cover administrative costs and distribution costs.
What Are No-Load Mutual Funds?
A no-load mutual fund is one where the investor doesn’t pay the fees or commissions. How does the investor avoid the fees?
The investor would not use the services of a financial advisor. Instead, they would go straight to the mutual fund and make their investment or go to a mutual fund supermarket to buy.
The investor would pay the net asset value for the investment without paying any of the front-end, back-end, or level-load fees.
Some no-load mutual funds will charge a very small fee that is worked right into the fund’s expense ratio which would be deducted from your investment on a daily basis.
Benefits of a Load Mutual Fund
You might be thinking to yourself why would anyone invest in a load mutual fund when they can do the no-load and save on the fees and commission.
Remember, what comes with a load mutual fund. Sure, you pay some fees. You also get expert financial advice from the advisor who guided you to the mutual fund.
Many people find the fees are the cost of doing business because they don’t have the time or skills to do the research themselves. It would also mean staying on top of the no-load mutual fund once you make the investment.
Many people find using a mutual fund calculator helps them to have a clear picture of both what they might make from the mutual fund and what it will cost them in the fees and commissions.
A mutual fund calculator allows you to enter in all your information and calculates out cost and potential investment growth so you have a clearer picture before investing.
Benefits of a No-Load Mutual Fund
There are some benefits to the no-load mutual fund. The most obvious benefit is that you avoid paying any or minimal fees and commissions on your investment. The money you invest is used for the actual investment versus some going for investment costs.
You also tend to have more control over your investment. If you’re willing to do the research to learn about fund options, then maybe a no-load fund is right for you.
Understanding No-Load vs Load Mutual Funds
Mutual funds are popular with investors for a variety of reasons. But mostly, they give investors options. The Investors can be as involved or uninvolved in the investing process as they are comfortable with.
If you’re interested in doing more investing and need the assistance of a neutral financial advisor, we can help. Contact us today to set up a time where we can discuss your investment goals for the future.