Websites and brochures for investment companies are full of ads for no load mutual funds. But, just what are no load mutual funds? And, why do investment houses advertise them like they’re the best thing since sliced bread?
Well, let’s start with the term “load”. Load is essentially the sales commission. Just like every other business, mutual fund companies have to make money, and they have to pay the people who sell the financial instruments they sell. So, when you pay an upfront load, you’re paying the sales commission at the time of sale. Let’s say you invest $10,000 in a front loaded mutual fund with a 5% fee. You’ll actually be investing $9500 and paying $500 in sales commission.
With a back loaded mutual fund, you pay the sales commission when you sell the shares in the mutual fund. You’ll pay the commission on the lower of what you originally invested or what the fund is worth when you sell your shares. For instance, if that original $10,000 investment is worth $15, 000 when you sell your shares, you’ll still only pay the commission on $10,000. However, if you’ve lost money, and your shares are now only worth $8,000, you’ll pay commission on $8,000. Some back loaded funds reduce the amount of commission you owe based on how long you hold on to the shares. For example the commission may be 5% if you hold the shares less than one year, 4% if you hold them between one and two years, 3% for two the three years, etc. Much of the time, the commission is waived entirely if you hold the shares long enough – making this investment a no load mutual fund if it’s held long enough.
There are also no load mutual funds that waive sales commission even without the requirement that you hold the shares for a minimum amount of time. However, sometimes these no load mutual funds actually cost you more money than a fund that charges a sales commission. These no load mutual funds often charge more in fees than mutual funds that charge a commission, to make up the difference. After all, the sales people have to get paid somehow. And, the fees these no load mutual funds charge to make up for not charging a sales commission may be yearly; meaning that you’re paying these each and every year. In the long run, you may pay far more than if you’d just paid the sales commission up front.
No load mutual funds can be a good way to save money, or they can actually be very expensive to own. Instead of choosing a mutual fund because it’s no load, it’s wiser to look at the overall fee structure when deciding if the mutual fund is cost effective. Talk with your investment advisor about the mutual funds available to you, and determine the one that works best for your investment goals and that is most cost effective. You might find that no load mutual funds are best for you, but you might find other alternatives that are even better. No load mutual funds are one investment option that’s worth evaluating as you decide the right investments for your portfolio.