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What
are no-load mutual funds? (Page 1 of 2) |
No load mutual funds are mutual funds whose
shares are sold without a commission or sales charge. The reason for
this is that the shares are distributed directly by the investment
company, instead of going through a secondary party. This is the
opposite of a load fund, which charges a commission upon the initial
purchase at the time of sale.
Since there is no cost for
you to enter a no-load fund, all of your money is working for you.
If you purchase $10,000 worth of a no-load mutual fund, all $10,000
will be invested into the fund. On the other hand, if you buy a load
fund that charges a commission of 5% upon purchase, the amount
actually invested in the fund is $9,500. If both funds return 10%,
the no-load fund would have grown to $11,000 while the loaded fund
only rose to $10,450.
The major idea behind a load fund is
that you will make up what you paid in commissions with the solid
returns that the managers will provide. However, most studies show
that loads don't outperform no-loads.
Most load mutual
funds are sold through brokerage houses, financial planners, and
people known as "Registered Representatives." With very few
exceptions, most of these people operate on the basis of selling as
many fund shares as possible. Their commissions are collected up
front, as a back end charge, or both. Whether you make money or lose
it isn't their primary concern. What matters most to these folks is
how often you buy (and generate new commissions for them).
No load funds have traditionally been marketed directly by the
mutual fund companies themselves. But today, more and more funds are
being offered through discount houses like Fidelity, Schwab, and a
host of others. The advantage to this is that you have an unlimited
choice of mutual funds in one place. You don't have to open a
separate account for each mutual fund family that you purchase.
Most fee based investment advisors have independent relationships
with the major discount firms. They're able to offer clients just
about any no load mutual fund that is available. They receive no
commissions from the firm and only get paid by the client according
to a pre-determined fee arrangement. Under this type of arrangement,
there's no hidden agenda to try to sell you a particular mutual fund
in order to earn a larger commission.
It is best to stick
with no-load or low-load funds, but they are becoming more difficult
to distinguish from heavily loaded funds. The use of high front-end
loads has declined, and funds are now turning to other kinds of
charges. Some mutual funds sold by brokerage firms, for example,
have lowered their front-end loads to 5%, and others have introduced
back-end loads (deferred sales charges), which are sales commissions
paid when exiting the fund. In both instances, the load is often
accompanied by annual charges.
On the other hand, some
no-load funds have found that to compete, they must market
themselves much more aggressively. To do so, they have introduced
charges of their own.
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