What is a No Load Mutual Fund

what is a mutual fund loadEver here that an investment has a load or is a no load and been confused?  No more, here is a run down on what a load is.  (Text below video)

The initial and deferred sales fees make up what are commonly referred to as loads.

A load is a percentage the fund company charges you either when you invest the money, initial sales fee, or when you sell your investment, deferred sales fee.  It is taken directly out of your investment.  Thus if you are investing $10,000 and the initial sales fee is 2%, then $200 is taken for the fee and only $9,800 gets invested into the mutual fund.

A deferred sales fee is also a percentage of the money, but it is taken out when you make a withdrawal from your mutual fund.  This one is not as straight forward as an initial fee, because there are many ways to calculate the fee.  Some companies do it based on your initial amount, some do it based on the amount at withdrawal, and some actually reduce the fee over time.

This reduction is known as a contingent deferred sales load or CDSC.  You will want to read the prospectus carefully if you see the fund has a deferred sales fee.  This is the only way you can tell exactly how it is calculated.

Benefits of Paying a Load

The biggest benefit of paying a load on a mutual fund is that you typically get lower annual fees.  Thus after you recoup the costs of the initial load, the fund has to make less each year in order to beat the market.  If you are buying and plan on staying for many years in the same fund, this might be a good alternative.

Why Not Pay a Load

  1. The first obvious reason to not pay a load is that you invest more money right away.  Lower fees mean more money to grow in your account, allowing you more compounding and growth right away.  Remember with a load, you have to make your money back first before you ever see any gain.
  2. Many funds that have a load have other options to get into the exact same fund by not paying a load.  These options are called share classes, and they vary mainly in expenses, but are all invested in the same stocks.  If you’re financial planner is recommending a load fund and you are paying him another way, such as an annual fee, then ask if you can look at one of the other share classes.  (And in the meantime look for a new planner!)
  3. You could feel stuck.  What if the investment is wrong for you?  What if the fund tanks?  What if your asset allocation needs changed?  If you are in a fund where you paid a load, you might feel like you should not sell out until you have made it worth it.  You may end up staying in an investment long after you should have gotten out.  Remember we do not know what the future will bring, so trapping ourselves in something is never good.
  4. There are plenty of no load mutual funds out there.  Back when mutual funds started, there were not other options, however over the years no load and index funds have been added to the mix.  This variety from high quality fund managers makes it possible to get the same if not better returns than a load fund.

Do You Need to Pay a Load

Short answer – no! Most mutual funds that have a load are sold by investment advisors, as a way for them to get paid.  The only way I would consider a load fund is if I was not paying my planner in any other way.  However, that is a really bad way to hire a financial planner, as they will not be looking at all your needs and instead they will search for investments where they get paid.  You are better off with a planner that is fee only or a flat fee instead of them getting paid by what they sell.

There you go a run down on load mutual funds!  Now for an action step:  go look at your existing funds and review the fees, specifically if you have a deferred load.  If you do this will allow you to prepare for that and know the rules.  If you don’t have any loads, congrats one less thing to worry about today! (How to review mutual fund fees)

Roger @ The Chicago Financial Planner says March 18, 2014

Good job of providing an easy to understand explanation of a really confusing topic Andrea. The financial services industry certainly doesn’t go out of its way to make this understandable for the investing public either. As a fee-only advisor I am of course biased against investors paying any sort of load. Pay for advice, not product sales.

    Andrea says March 19, 2014

    Roger, thank you! I love your line at the end: pay for advice, not product sales. That is so spot on!

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