What Is Good About No Load Funds?

When investing in mutual funds, among the potential disadvantages that you may have to overcome are the fees. Not only do you have to pay an annual fee to the fund for management expenses, you may also have to pay a commission to buy shares. With no-load mutual funds, however, you can avoid some of these expenses.

No Sales Commission

The primary advantage of investing in no-load mutual funds is that they do not charge a sales commission. By comparison, when you invest in mutual funds with loads, you have to pay a percentage of the transaction so that your broker can be compensated. When you buy no-load funds, you can avoid these charges and potentially put more money into investments over the long-term. You will still have to pay the expense ratio for the fund each year, but you can at least save on the commission.

Higher Returns

When you invest in a no-load mutual fund, you can often expect higher actual returns than what you can get from a load mutual fund. Many investors believe that load funds have better management or are superior in some other way. In reality, there is no hard evidence that load funds perform any better than no-load funds. On top of that, when you invest in a no-load fund, you also have a head start because you keep more of your money in the fund.

Ongoing Expenses

In addition to saving you money on the front end, a no-load fund can also save you money on ongoing expenses in the future. Many companies that charge sales loads have to advertise and promote more to get customers. Because of these extra advertising costs, the company has to charge more additional fees. This increases the amount of the expense ratio that you have to pay and takes more money out of your returns every year.

Caution

Although no-load funds can save you =money, they are not always the best investment option. Just because a mutual fund charges a sales load, that does not necessarily mean that it will perform poorly. Some mutual funds with sales charges have such high returns that they still outperform no-load funds even when factoring in the cost of the sales charge. Before choosing a fund, be sure to research its long-term performance in order to find out exactly what you are getting into.

References

• The Motley Fool; Don't Pay Your Broker for Free Funds; Dan Caplinger; May 2008
• "USA Today"; No-Load Funds Can Be An Excellent Deal; John Waggoner; May 2005
• InvestorGuide.com: What's the Difference Between Load and No Load Funds?; Elle; November 2009
• CNNMoney.com: Which is Better, A Load Fund or a No-Load Fund?