What are No Load Mutual Funds?
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In order to understand what it means to invest in no load mutual funds, you must first understand what it means to invest in loaded mutual funds. Loaded mutual funds are funds that carry a sales load which is commission paid to investment brokers typically ranging anywhere from four to eight percent. Mutual fund investing of this type generally means that you pay the sales fee up front, on the back-end, or there is an annual fee associated with it. No load mutual funds do not contain any type of commission or sales charge because the shares are distributed directly to the investment company, rather than going through a secondary party. The reason for this is that there is no transaction cost to purchase this type of mutual fund and therefore all of the money invested is working for the investor. The justification provided for loaded mutual funds is that the investors are compensating a sales intermediary, such as an investment advisor, or a financial planner for his or her time and expertise in the selection of an appropriate fund. Investors seek out no load mutual funds instead of loaded mutual funds because they believe that they will outperform the higher priced funds over time because the fees won’t eat away at the overall net return on investment. The shares for this type of fund are purchased directly from a mutual fund company or indirectly though a mutual fund supermarket. True no load mutual funds contain absolutely no fees, whereas a supermarket no load fund may contain a very small fee referred to as the 12b-1. This 12b-1 fee can be 0.25% to 1.0% of its assets, and is also known as the cost of distribution. It is still however, considered a no load fund and will lead to better investing and diversification of your investment portfolio. Words of wisdom regarding no load mutual funds consist of a few known facts that investors should realize before investing money in mutual funds. For instance, for every high-performing loaded mutual fund, there is a similar no load fund or low load mutual fund that can be purchased at a cheaper price. When investing in mutual funds, no load funds consistently outperform loaded funds after you take into consideration final calculations, and a load does not go towards any type of incentive for the fund manager to perform better.
Investing advice that you should also consider is this. If a loaded mutual fund is held over a long period of time, the effect of the load is not diminished as quickly as you would think, if paid up front. It is interesting to note that if you selected a no load mutual fund, that money paid (as if it were a loaded mutual fund) would have been compounding over the whole time period. In fact studies have shown that no loaded mutual funds significantly and consistently (as stated above) outperform loaded funds.Successful investors realize that to build a strong portfolio, mutual fund investing is a must. It is up to each investor, however to determine the type of mutual fund that they will invest in to achieve portfolio diversification. While loaded mutual funds can still provide a great return, each investor will ultimately need to decide whether the services provided by these loaded funds are valuable enough to justify giving up the higher returns of no load mutual funds.