Another aspect of mutual funds is choosing whether to go with a loaded mutual fund, or what’s known as a no load fund. What do these terms mean and is one better for you than the other? That really needs to be looked at on a case by case basis.
First to clarify what the terms really mean. All funds have fees. The reason you get into funds is because you don’t want to have the concern of choosing the investment vehicles, so you pay someone to monitor the performance and you pay a management fee (usually anywhere from 1 to 3% per year.) That is true for load and no load funds.
A loaded fund is one that has commission involved when you buy or sell your shares. This commission can range anywhere from 1 to 6% and is usually charged either on the front-end (when you buy) or on the back-end (when you sell.) So why would you want to pay commission on top of the management fee? The reasoning behind it is that the salesperson has done the research for you, and the additional charge will be worth the cost because the fund will have better returns. In truth, with all the available information on-line, anyone can do minimal research and choose funds as well as that salesperson. That load will cost you, and in most cases it’s not worth the cost.
No load funds, on the other hand, are managed funds that have no additional commission charges. The return on these funds is comparable to the loaded funds, so the ‘expertise’ of the salesperson is pretty much not a factor. As a low dollar example, let’s consider the following case:
Bill invests $1,000 in a no load fund. Over the course of the year the fund has a 10% gain. The management fee is 1%, so Bill is charged 1% of $1100 dollars or $11. Bill’s total return on his initial investment is $89 or 8.9%
Sue invests $1,000 in a loaded fund. She is charged 3% front end fee, so her initial investment is $970 ($1000 minus $30) her fund also gains the 10% return, so her pre-management ending balance is $1067. The management fee is also 1% so her actual ending balance is $1057. Sue’s total return is 5.7% In the case of a back end load, the back end fee would have been even greater ($1100 times 3% = $33) and her return would have been less.
The bottom line is no-load funds are definitely the best value for your dollar, if you choose to invest in mutual funds.