No-load Mutual Fund Explanation
by Christopher Hundley
When investing in mutual funds, it is important to understand how they work as well as some of the more prevalent investing strategies before committing your hard-earned savings. A popular financial strategy in recent years has been no-load mutual fund investing. These funds carry no sales fees and can offer healthy returns if you invest competently.
Load: A Definition
The term "load" refers to sales fees on mutual funds. No-load mutual funds lack these sales charges.
Types of Loads
There are front-end load funds and back-end load funds. Front-end load funds require a sales charge at the time you purchase the securities. For example, if you buy $100,000 worth of shares of a 2 percent load mutual fund, you will wind up paying $2,000 to buy $98,000 worth of shares. A back-end load requires a sales charge only when you sell shares of your fund. So if you sell $100,000 worth of shares of a 2 percent load mutual fund, you will be charged $2,000.
Mutual funds also often carry 12b-1 fees, which are annual marketing or distribution fees. These fees can range from 0.25 percent to 1 percent of the fund's assets. Generally speaking, no-load funds tend to have lower 12b-1 fees, though some, known as "true no-load funds" carry no 12b-1 fees.
Loads can have a considerable impact on returns. If you buy $100 worth of shares of a 3 percent back-end load fund that grows to $10,000 over time, you will pay $300 to realize the gain---200 percent of your original investment amount.
Investing in load mutual funds can diminish your returns. If you buy $100 shares of a 2 percent front-end load mutual fund at set intervals over a fixed period---say, monthly for five years---you will have invested $5,880 over the period rather than the $6,000 you would have been able to invest in a no-load mutual fund.
That 2 percent load can be even more significant when you consider returns. Consider if you made a $10,000 investment in a no-load fund and one in a 2 percent load fund, both of which earn 10 percent each year. At the end of the first year, the load mutual fund would have yielded $10,780, while the no-load mutual fund would have yielded $11,000. After thirty years, the no-load mutual fund would yield $174,494 versus the load fund's $171,004. That's a difference of $3,490---no small sum. And that is without considering dividend reinvestment or other factors that could boost the return.
No-load mutual funds, despite the potential for superior returns because of the lack of fees, may not, in fact, provide superior fees. The performance of any mutual fund is a matter of its investment strategy over a particular period. A load mutual fund may provide a return that, even after the sales charge, is higher than the return of a no-load fund. Over the course of a year, a 2 percent front-end load portfolio fund may yield a 100 percent return, whereas a no-load mutual fund may yield a 50 percent return due to a superior investment strategy.