If you are thinking about investing in mutual funds, you will first have to decide whether you want to buy a load or no-load mutual fund. There are advantages and disadvantages to each type. Which type of mutual fund is best for you is often a personal choice, but you need to be informed of the pros and cons of each before you make a decision as to which direction to take.
The basic difference between the two types of mutual funds
The word load simply refers to all of the fees that are charged for investing in a mutual fund. The actual cost will be dependent upon the particular mutual fund, but these costs to the investor can include management fees and trading costs. A no-load mutual fund has no fees other than the annual distribution fee, but this is often no greater than one percent. A load mutual fund has higher fees, because they offer more services for their fund than a no-load fund does.
The disadvantages of a load mutual fund
Fundamentally, a load mutual fund is one that you purchase from your investment broker or advisor. There are going to be commissions or broker fees that you will have to pay when you purchase a mutual fund in this manner. These fees will be paid either on the front-end or back-end of the fund purchase. The higher fees associated with load mutual funds are the single reason that they are discouraged by people who consider themselves investment experts.
The advantages of a load mutual fund
The experts who claim that this type of mutual fund is inferior because of the fees seem to assume that everybody is an expert investor. Many investors need advice on which mutual fund to buy because they have little knowledge about mutual funds, and this is what the load mutual fund is for. Other investors could do their own research, but this is time consuming, and they are busy with other things such as a career. If you have a good financial advisor and trust him or her, it will be a better choice to put your money in a load mutual fund.
The advantages of a no-load mutual fund
Because the cost of the fund is much lower, an investor does not have to worry about profits being eroded due to the fees of the fund. Savvy investors can search out no-load mutual funds with the lowest fees. Often, buying a no-load mutual fund directly from the company that sell and operates it will be the funds with the lowest fees found in the market. For those with skill in finding the funds with the best returns, the lower fee with a no-load fund is usually the way to go.
The disadvantages of a no-load mutual fund
There is very little in the way of assistance and advice with no-load funds; therefore, they are strictly for the investor who knows what he or she is doing. You must do all of your own research to succeed with this type of fund, so if you are a beginner with little investment experience or you do not have the time to dedicate to investment research, a no-load mutual fund is probably not for you.
Which type of fund is best for you is your decision. It is true that studies show that a no-load mutual fund, on average, will produce greater returns than a load fund, but the time it takes to get a greater return may not be worth the trouble. This is particularly true with younger, professional individuals, who are often better off increasing their job skills and building their careers. However, there are many people who also make a hobby out of their investment research, setting aside time to do the necessary research to succeed with no-load funds. If this is the case, the no-load mutual fund may be best for you. The choice is yours.
