Mutual funds involve pooling multiple investors’ money into an investment product. Arguably, there are as many types of mutual funds as there are investment products. To this end, there are many factors to consider when investing in one. Considerations include type of mutual fund, management options, investment size, and more.
One of the main considerations when investing in a mutual fund is cost. How much will you spend investing? Is it worth it? Is there a way to minimize costs? These are important questions to probe.
You have two options, in relation to costs, when buying mutual funds: load funds mutual and no load mutual funds. Following is a comprehensive insight into how no-load mutual funds work and a brief comparison with 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 of Load Funds
Notable advantages of load funds include:
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.
- Informed Decision-Making
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.
Caution: 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 of Load Funds
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 load. 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.
What is a No Load Mutual Fund?
A no load mutual fund is a type of investment vehicle that charges no sales commission when buying, selling, or exchanging shares.
This makes it an attractive option for investors who want to avoid paying any extra fees or commissions on their investments. No load funds also typically offer lower expense ratios, which can make them more cost-efficient for long-term investors who plan to hold their holdings for a longer period of time.
Instead, the buyer purchases his/her desired mutual fund directly from the investment company. This is also the reason for the absence of charges.
Advantages of a No Load Mutual Fund
There are two main advantages of investing in no-load mutual funds:
- Maximum Investment Capital
The fact that no-load mutual funds don’t have attached charges or commissions means that no money is deducted from your original investment funds. Consider the earlier example of an investor investing $1,000 in a load fund, whereby he/she ends up with $50 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
An investment advisor’s 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 of a No Load Mutual Fund
The main disadvantage of a no-load fund is the lack of professional advice and guidance. You are responsible for processing the transaction, including analyzing and comparing the available options.
Caution: 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 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.
The Main Differences Between a Load and No-Load Mutual Fund
The main difference between a load and no load mutual fund is the cost. Load funds charge an upfront sales fee, also known as a “load”, when buying or selling shares. No-load funds do not charge any additional fees for transactions, which can make them more cost-effective for investors over the long term.
Another difference is that some no-load funds may have higher expense ratios than load funds, but this varies depending on the type of investment product. Finally, load funds may be actively managed whereas no-load funds are typically passively managed.
Make an Informed & Profitable Investment Decision When It Comes to Mutual Funds
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.