What are Load and No-load Mutual Funds?

Mutual funds are a popular investment option in which a group of investors pools money to hire a portfolio manager, who in turn buys stocks, bonds and other securities. This diversifies your portfolio at a reduced risk, limiting your reliance on one stock or sector. You have to make some important decisions before you invest in a mutual fund. Do you choose a no-load fund or a load fund? Learning as much as you can about your options should serve as a starting point.

Load or no-load?In the case of load funds, you pay a fee for an adviser or broker’s time and expertise in choosing the investment options. The sales commission comes out of the funds you plan to invest before it enters into the mutual fund (front-end loads) or is taken when the shares are redeemed (back-end load or contingent deferred sales charge). If you go with a level-load, the commission is taken out annually for the duration of the fund.

No-load mutual funds cut out the middle man. The investment company distributes the shares directly, getting rid of the commission or sales charge that comes with an investment adviser or broker.

FeesYou may dodge the sales charge with a no-load mutual fund, but you still have to pay some fees. Any fund brings with it operating expenses. According to the Securities and Exchange Commission, no-load funds may charge purchase, redemption, exchange and account fees. Some funds charge shareholders purchase fees when buying their stocks. Redemption fees are often put in place to discourage short-term trading. An exchange fee may be charged for transfers within the same group of funds. The fund may levy an account fee for the maintenance of accounts that are valued under a certain dollar amount. Since you are going to have to pay seemingly extra costs no matter which option you choose, you should look at the role that different fees will play and not just focus on loads.

If you want to invest in a no-load mutual fund, first examine the fine print to see how the fees will affect your returns. You can use a mutual fund calculator to get a clearer picture of the long-term impact of different fees and charges on your money.

Which one should I choose?Some investors opt to go with load funds because they lack confidence in their own ability to make smart investment choices. Others simply do not have the time to put in the hours of research often required when deciding where and in what to invest. Another pro-load funds argument is that advisers serve to prevent investors from making impulsive decisions.

Others want to take control of their money, so they may decide on a no-load mutual fund. Maybe they do not trust financial advisers and would rather make all of their own decisions. Some see no-load funds as the best option because there are lower fees and fewer expenses. Thanks to the Internet, there is the option of investing in a no-load fund completely on your own through an online broker, which makes it easier than it was in the past.

So which one should you choose? Lay everything out in front of you and see which best lines up with your financial goals.