How to Compare Load Funds to No Load Funds
No-load and load may sound like terms better used in logistics or distribution, but they are actually used to describe two different types of mutual funds. "Load" refers to the commission paid to the broker who's selling you the fund. "No-load" means there's no commission. Investors who don't want to pay a commission will typically choose the no-load fund. Others believe that loaded funds are better since you're paying for investment management and advice; however, there is little evidence to suggest that load funds perform better than no-load funds. Ultimately, the better choice is the fund with the best performance, but how do you compare the two types?
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Instructions
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Research who's selling the funds. Most load funds are sold through brokerage houses or financial representatives. They collect commissions in the range of 5 to 6 percent on the sale of the fund. They get paid whether you make money or not, so the incentive for them is to sell you as much as possible, no matter what you buy.
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Determine who the marketer is. If the mutual fund is marketing the fund directly it usually has independent relationships with discount investment houses that can offer the fund no-load. These discount firms receive no compensation from the actual sale, but receive a flat fee to offer the fund to investors. There is little incentive to sell you something you don't need.
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Compare 12b-1 fees. You can find these in the prospectus. These are also known as marketing, distribution, and service fees. Legally, a fund can charge 12b-1 fees up to .25 percent of net assets and still be a no-load fund. Load funds usually change up to 1 percent.
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Compare expense ratios. You can find this in the fund's prospectus expressed as a percentage of the total fund assets. This is also known as the management expense ratio (MER) and includes advisory fees, administrative costs and other operating expenses (including 12b-1 fees, which are fees assessed on the fund's investors to pay for marketing the fund to other investors).
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Compare redemption fees. These fees are not included in the MER. Also known as the 'short term trading fee', this is a fee that can be charged at the time you sell your shares if you fail to hold them for a required period of time. The SEC limits this fee to 2 percent of your investment.
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Compare trading activity costs. These are costs associated with buying and selling securities with the fund's portfolio. They are not included in the MER. Look at the turnover ratio to gauge trading activity costs. The turnover ratio tells you how often holdings have been replaced within one year. A high ratio indicates that the fund is incurring more trading costs, in the form of commissions paid to the brokers who buy and sell stocks for the fund, than one that is trading less frequently. The turnover ratio can easily be found on websites such as Morningstar.com
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