Copyleft 2006. Michael Saville
No-load mutual funds are mutual funds whose shares can be bought and sold without a sales charge or commission. The reason for this is that the investment company gives out the shares directly, without going through a third party. This is the opposite of a load fund, which charges a fee when the first investment is made.
Since investing in a no-load fund doesn't cost you anything, all of your money is working for you. If you buy $10,000 worth of a mutual fund with no fees, the whole $10,000 will be put into the fund. On the other hand, if you buy a load fund that charges a commission of 5% when you buy it, you actually put $9,500 into the fund. If both funds earn 10%, the no-load fund would have grown to $11,000 while the loaded fund would have only grown to $10,450.
The main idea behind a load fund is that the good returns you get from the managers will make up for the commissions you paid. Most studies, though, show that loads don't do better than no loads.
Most load mutual funds are sold through brokerage houses, financial planners, and people called "Registered Representatives." Most of these people are based on selling as many fund shares as possible, with very few exceptions. Their commissions are either paid up front or as a charge at the end. They don't care much about whether you make or lose money. Most important to these people is how often you buy from them (and generate new commissions for them).
Usually, the mutual fund companies themselves have been the ones to market no-load funds. But now, discount houses like Fidelity, Schwab, and many others are offering more and more funds. The good thing about this is that you can choose from a huge number of mutual funds all in one place. You don't have to open a new account for each family of mutual funds that you buy.
Most fee-based investment advisors work with the major discount firms on their own. They can sell clients almost any no-load mutual fund that is on the market. They don't get any commissions from the firm and are only paid by the client based on a set fee. With this kind of deal, there's no secret plan to try to sell you a certain mutual fund so that they can get a bigger commission.
It's best to stick with funds with no or low fees, but they're getting harder to tell apart from funds with high fees. Fewer funds are using high front-end loads now, and they are using other types of charges instead. Some brokerage firm-sold mutual funds, for example, have lowered their front-end loads to 5%, and others have added back-end loads, which are sales commissions paid when leaving the fund. In both cases, the load usually comes with annual fees.
On the other hand, some no-load funds have found that they have to market themselves much more aggressively if they want to keep up with the competition. In order to do this, they have added their own fees.
Because of this, low loads, redemption fees, and annual charges have been put in place. Instead of annual charges, sometimes low loads (up to 3%) are added. Also, some funds have started charging for putting money in or taking it out.
Back-end loads are similar to redemption fees: When you get out, you pay a certain amount of the value of your fund. Loads are based on how much you've put in, while redemption fees are based on how much your fund assets are worth. Some funds have a sliding scale for redemption fees, so the longer you keep your money in the fund, the less you have to pay to get it out. Some funds use redemption fees to discourage short-term trading, which is meant to protect investors who plan to keep their money for a long time. Most of the time, these funds have fees to withdraw money that go away after six months.
The 12b-1 plan, which is an annual charge, is likely the most confusing. When a fund uses a 12b-1 plan, the adviser can use fund assets to pay for things like advertising, distributing fund literature like prospectuses and annual reports, and paying sales commissions to brokers. Some funds hide their load charges by using 12b-1 plans: They charge the fund very high fees and use the money to pay brokers to sell the fund. Since the charge is made every year and is based on the value of the investment, it can cost a long-term investor more in the long run than a high sales load. All prospectuses must have a fee table to explain how a 12b-1 plan and other charges work.
The fee table makes it easier to compare the total costs of different funds. You won't get the best results if you choose a fund based only on its expenses, which include loads and charges. However, avoiding funds with high expenses and unnecessary charges is important for long-term performance.
