The Difference Between Load and No Load Mutual Funds
Load vs. No-Load Mutual Funds.
When it comes to the stock market and investing, the terms and phrases used can quickly become overwhelming. Especially when your own money is at risk. Although mutual funds are touted as a low risk method of investment and a relatively safe means of achieving decent returns, extra management fees and “loads” can quickly erode any profits received. In this article we will take a look at mutual fund terms such as “loaded funds”, “back-end” and “front-end” loads, as well as compare the difference between these and no-load funds. What’s more, we’ll do this in plain English, so you can go away feeling confident your next mutual fund investment is an educated one.
Load – Another word for “Fee”.
Let’s quickly review the structure of a typical mutual fund first. The idea is that thousands of people pool their money together to be invested to achieve specific purposes. There are mutual funds focused on growth, income, diversification, mid cap, small cap, the list goes on. One thing is true of all mutual funds, no matter what their focus – there are managers who decide where the money will be invested. This is their job, and so it is only natural they should expect compensation.
Most managers’ pay is taken from a “management fee” associated with the fund they manage. This fee is usually an annual percentage of the profits generated in the mutual fund. For some mutual funds, this is their only fee, and it covers salary and other expenses. Other mutual funds, however, may charge additional fees, all for varying reasons.
One of these additional fees is called a “load”. A load is a one-time fee, paid when a mutual fund is either bought or sold. So a “loaded fund” would be a mutual fund that has an additional fee… the load. There are several ways this fee can be implemented by the fund managers. A “front-end” load, also called a “front load” means you pay this additional fee up front. That is, when you first purchase the mutual fund. This means a “back-end load” would be just the opposite – paying the extra fee when the mutual fund is sold.
In either case, you are paying an additional fee for the privilege of buying or selling a particular fund.
No-Load Mutual Funds.
We touched on this briefly, but a no-load fund is one that has no additional fees when buying or selling shares in the fund. Although an annual management fee will most likely apply, the rest of the profits earned will be shared among owners of the fund.
Comparison
At first glance, it may seem like this is a no-brainer. And for the most part, it is. Why pay extra fees when you don’t have to? By the time you add up commissions, the annual management fee, and any loads or other fees, the stock market may have to rise 4-6% or more just for you to break even. This can seriously reduce your profit potential.
On the other hand, there are a few mutual funds that are worth the extra fees, and have experienced managers who consistently bring in above average results. These cases are few and far between, however, as consistency is difficult in a fluctuating market such as the stock exchange.
In the end, it is important to do your research and understand exactly what fees will be charged and when. High fees are one of the biggest hindrances to investment growth in mutual funds, so make sure to get the details before you buy. A load is a one-time fee, so its impact is reduced over time. If you are a long term investor, the load fee may have little effect on your investments. If, on the other hand, you regularly buy and sell mutual funds, the extra fees with loaded fund transaction would make turning a profit very difficult.
So, look into the funds before you buy them and find what aligns with your investment tastes and strategy. When in doubt, go for the no-load funds. After all, you can’t make money by paying extra fees.