Why You Should Buy No-Load Funds!
Load is defined as the fee or the commission that an investor pays to a mutual fund at the time of purchasing or redeeming the shares of the mutual fund.
If the commission is charged when the investor buys the shares, it is known as a front-end load. On the other hand if the commission is charged when the investors redeems his shares, it is known as a back-end load.
Certain funds apply back-end loads only if the shares are redeemed within a specific time period after being bought.
The argument for applying loads on mutual fund transactions is that these loads will discourage investors from trading frequently in mutual funds. If the investors quickly move in and out of mutual funds, the funds have to maintain a high cash position to meet these redemptions, which in turn decreases the returns of the funds.
Also frequent trading means the expenses of the mutual funds go up.
There are various arguments against load funds:
-The fees that the mutual funds collect as loads are passed on to the fund brokers. The loads do not provide any incentive for the fund manager for better performance of the funds. In other words, a load fund has no reason why its managers should perform better than those of no-load funds.
-In the last few decades, no difference has been seen in the returns of load and no-load funds (if the loads are not considered.) When the loads are considered, the investors of load funds have actually gained less than the investors of no-load funds.
-When a sales person knows that he is going to get a commission from a load fund, he tends to push the load fund more - even when the load funds are performing poorly as compared to no-load funds.
-Loads are understated by mutual funds. If an investor invests $1000 in a fund with 5% front-end load, the actual investment is only $950. Thus his actual load is $50 in $950 investment - a 5.26% load.
If an investor is already invested in a load fund, it doesnt make sense to exit now. The load has already been paid for. The hold or sell decision should now only be based on what the investor thinks about the future performance of the fund. In a few funds, the exit load depends on the period for which the fund was held. Check the details of the fund prospectus for more information.
In most cases it is better to avoid load funds; however, investors should keep one thing in mind. Sometimes load funds can be a better choice than no-load funds. For example, an investor has a choice of two classes in a fund - class A and class B. Class A has 3% front-end load and Class B has no load. The investor however misses the fine print, which states that Class B has 1% 12b-1 annual fees.
If the fund will make 10% gains each year, its return in Class A (starting with actual amount invested $970) will be
($970) X (1.10) X (1.10) X (1.10) X (1.10) X (1.10) = $1562
For Class B, the returns will be
($1000) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) = $1532.
Thus the above example is an exception, where in the long run, the load fund will perform better than the no-load fund (with 12b-1 fees).
The fact is that a no-load fund cannot be considered a true no-load fund, if it charges fees from it's investors in the form of 12b-1 and other fees.
Lower your risk and turn your mutual funds into ever-growing streams of investment income. You pick the funds; I'll show you how to double or triple your returns ... for free! Read "GROWTH & INCOME: How To Build A Mutual Fund Money Machine" online for free at http://www.Autopilot101.com/free/book_GI/index.htm
Do you invest in stocks? Discover how to invest for high monthly income with less risk than most mutual funds. Get your copy of "MILLIONAIRE INCOME" for free at http://www.Autopilot101.com/free/book_MI/index.htm
More Articles
Commercial Mortgage Refresher Course
Get The Mortgage Quote Your Bank Doesn't Want You Tosee
The Flip-Flop Asset Allocation Method
Take The Guesswork Out Of Asset Allocation
Is An Index Mutual Fund The Best Choice For Long-Term Investing?
Plan Your Retirement For Income Through Mutual Fund Investment.
Mutual Funds As A Long Term Investment
Related Products And FREE Videos
More Articles
Understanding The Money Market
... investor is able to get into the game rather easily, the money market is dealing with such a large amount of money that it is much too high for most. Also, it is a dealer marketing in which companies and governments buy and sell within their own accounts and at their own risk. If this all sounds too good to not get into, the best way for the individual to get into the money market is to look into money ...
Market Timing With Your Mutual Funds
... from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between ...
Ways To Earn Good Profit Out Of Mutual Fund
... phases. We need to take notice towards the exposure to different sectors in the portfolio . While rebalancing the portfolio, the focus should be on those schemes in the portfolio that have been performing consistently and have a good quality portfolio. Lower your risk and turn your mutual funds into ever-growing streams of investment income. You pick the funds; I'll show you how to double or triple ...
Is It True That Regular Index Investing Performs Good Result With Low Risk?
... of people have no much money for big one time investment. But we can invest small amount of dollars every month. We have tested performance for 5-years regular investment into three indexes (S&P500, S&P Mid Caps 400, S&P Small Caps 600). The result of testing shows that every month investing small amounts of dollar gives good results. Statistic shows that you will receive profit from 26% to 28.50% of ...
Saving Money Through Investing In Mutual Funds
... Investing in mutual funds has emerged as the new buzzword amongst consumers in order to save money. But, for first time investors it requires a little bit of knowledge about the current market scenario. You need to keep in mind that when you are buying mutual funds you are actually investing in the shares of a corporation. You need to master the art of maximizing returns and minimizing risks to benefit ...