Load Funds vs. No Load

Comparing Load vs. No-Load Mutual Funds

All investors expect to pay certain expenses or fees when they buy a security or other investment. If they invest in mutual funds, it is logical to assume that the management company will have expenses in managing the fund. However, many mutual funds charge additional fees. It is important to understand the various fees that may be charged since high fees will quickly erode the investment returns experienced by the investor.

No-Load Mutual Funds

No-load mutual fund companies receive compensation for their services by charging a Management Fee. This fee is usually a percentage of assets ranging from .5% to 5%. Most large mutual funds investing in U.S. securities have management fees ranging between 1% – 2% of assets. This fee covers all the administrative expenses of running the fund, performing security research, running telephone call centers, and includes profit for the company. There are no other fees in No-Load funds, except for possibly an Exchange fee noted below. Fees are deducted from the assets of the fund and clearly noted on the investor’s fund statements.

Load Mutual Funds

A load is simply an industry term for Special, One Time, or Additional expense charged to the fund participants. Loads are fees. These funds also charge a management fee between .5% – 5% of assets, similar to No-load funds.

There are different types of load fees which may be charged at different times. The primary types of load fees are:

  • Sales Load – This is a commission the fund pays to brokers to market or sell the funds. Most sales loads are in the 4% range. This sales fee is called a front end load since it is paid when buying a fund.
  • Contingent Deferred Sales Load – This is a sales fee that is reduced over time and is imposed to discourage investors from trading in and out of the fund frequently. The fee usually reduces to zero after 1-2 years.
  • Redemption Fee – This is a fee charged when and investor leaves the fund. The fee ranges from 1% – 2% of assets.
  • Exchange Fee – The fee is imposed if an investor wants to trade in shares for another mutual fund.

Comparing Load funds vs. No-Load funds

Many investors buy load funds on the assumption that the investment returns must be better due to higher expenses. They follow a kind of “you pay for what you get” philosophy. It is true that a number of load mutual funds have consistently good investment performance and, therefore, may be worth paying the extra fees.

A number of studies have been done over the years to discover if load funds experience better investment returns than no-load funds. The findings of these studies confirm that there is no link or relevance between level of investment returns and the level of expenses charged. In other words, higher fees do not necessarily mean better investment performance. A person does not always “Pay for what you Get.”

Most investors would be better served using No-Load mutual funds for most of their assets. If the funds used have an average management expense of 1%, the investor has 99% of his assets invested on his own behalf. On the other hand, an investor using Load mutual funds may pay 5% front end loads, and have 1% annual management expense. His funds will have to earn 5% just to get him to even with the no-load fund investor.

No-load mutual funds will serve the needs of most investors who want to invest long term in high quality securities. Stick with the large well-established no-load companies such as T. Rose Price or Vanguard. These companies have been in operation a long time and are very customer focused. They both have a wide array of funds which will provide the necessary diversification that all investors should have.