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No-load Mutual Fund Explanation

by Christopher Hundley
  • Overview

    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.
  • 12b-1 Fees

    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.
  • Advantages

    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.
  • Disadvantages

    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.

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