In 2020, the number of US households that owned mutual funds was between 43% and 46.3%. The number of investors has more than doubled since 1990.
So, what makes mutual funds so appealing for investors? Wealth management and the goal to grow your money has become much more important to Americans who realize that to retire someday, they must start early to grow their money for the future.
With so many Americans taking advantage of investing in mutual funds, what type are they choosing? How much do they know about what they’re investing in?
Read on to learn more about no-load mutual funds and how they compare to load funds.
What Is a No-Load Mutual Fund?
No-load mutual funds, sometimes just called no-load funds, is one option when you choose to invest in mutual funds. No-load funds are purchased directly from the fund to avoid having to pay a commission or sales charge.
Instead of purchasing the fund through a broker or investment manager, you would purchase right into the fund thus eliminating the need to pay the commission or sales charge from purchasing through a third party.
When the goal is to make and grow your money, buying a no-load mutual fund allows investors to avoid additional fees and charges that might take away from the growth of their investment.
How Do No-Load Mutual Funds Work?
Before considering how a no-load fund works, let’s consider a mutual fund first. You need to remember that a mutual fund is a company or business.
The fund pools money from investors allowing them to diversify into all the things the fund buys into. A mutual fund will invest in securities like stocks, bonds, money market instruments, and other assets. And there are many, different kinds of mutual fund options on the market for investors to choose from.
So, when you choose to invest in a mutual fund, you need to know some things about the fund, its performance, and even what it buys into. For this reason, many investors opt to use load mutual funds. (More on them shortly).
If you wanted to invest in the no-load fund, you’d skip going to the financial planner or investment advisor to find the mutual fund and make the investment. Instead, you’d go straight to the fund to buy-in.
This means, again, you can avoid fees and commissions typically. It also means you need to do all the work yourself in finding, selecting, and monitoring the fund you choose.
What Are Loads in Mutual Funds?
As you consider the difference between load and no-load funds, it’s important to know the term loads. When an investor refers to a load of a mutual fund, they’re talking about the fees that are associated with the fund. These fees are paid to the financial advisor as commission or sales fees.
Loads can be paid at different times depending on the type of mutual fund you’re buying. There are front-load funds, back-load funds, and level-load funds.
A no-load fund doesn’t avoid fees completely (more on this shortly), but they are minimal and so it’s considered a no-load fund.
Why Buy No-Load Mutual Funds
Of course, many investors might think about putting their money into a mutual fund and think why would I spend money on a fee when I can avoid it? Of course, the allure of a no-load fund is saving money on the load that comes with the fund.
The real benefit of investing in a no-load fund is that you can maximize the money you might make from the fund because you’re not spending it on fees. No-load funds tend to have lower average expense ratios which often translates into better returns from the fund too.
What Are 12b-1 Fees?
Remember, even no-load funds often have some fees associated with them. They are not as significant as a load mutual fund though.
No-load mutual funds usually have what’s called 12b-1 fees. This is a small administrative fee that’s in place from the fund itself. Those who invest in the fund pay the 12b-1 fee.
Usually, this fee is assessed for marketing, distribution, and service costs associated with the fund. Since the fund will do distributions, for example, it covers these costs.
The Financial Industry Regulation Authority (FINRA) restricts the amount that’s allowed to be charged to investors. it’s often around 1%.
Deciding Between a No-Load Mutual Fund and a Load-Waived Fund
There is something called load-waived funds. With these funds, you’d still work with a financial planner or investment specialist. They will sometimes waive the load on investing in a mutual fund. This makes it a load-waived fund.
So, what’s better: a no-load fund or a load-waived fund? That probably depends on you as an investor. You need to decide how much research and work you want to do as an investor. Many people feel like the fees associated with a load fund are worth it because of the expertise that comes with it.
Often no-load funds come with lower average expense ratios which eventually convert into higher returns for you as the investor. On the other hand, a load-waived fund comes with expert advice and support. The financial expert is doing the work for you.
You might be thinking why would a load-waived fee not be a good idea if the financial expert is waiving the fee. Then you’d only pay the 12b-1 fees. Be sure to check what you’d actually pay in the 12b-1 fees. Sometimes in load-waived funds, the 12b-1 fees are much higher. It’s how the expert still makes some money.
Mutual Funds and Wealth Management
The most important part of wealth management is understanding where you’re putting your money, will it grow then funds, and is the investment secure.
Houston wealth management services can help you find just the right option for you as an investor. Contact us today so we can help you decide the best investment path for your future.
