Load v/s No Load - Types of Mutual Funds, Investing in Stock Markets | Investing in Stock Markets - B Com PDF Download

Believe it or not, there are good arguments on both sides of the no-load funds vs load funds debate. One or the other type may be best for you, but before you build a portfolio of mutual funds you need to learn the basics of loads and other mutual fund fees and understand the purposes and differences between the various share classes of mutual funds. You will then be able to determine which type is best for you.

What is a Mutual Fund Load?

A mutual fund load is a fee charged for the purchase or sale of a mutual fund. Loads charged upon purchase of fund shares are called front-end loads and loads charged upon the sale of a mutual fund are called back-end loads or a contingent deferred sales charge (CDSC). Funds that charge loads are generally referred to as "load funds" and funds that do not charge loads are called "no-load funds."

Reasons to Buy a Load Fund

Why buy a load fund? At first, you may think that no-load funds are the best way to go for investors but this is not always the case. The reason for buying loaded funds is the same as the reasons loads exist in the first place -- to pay the advisor or broker who did the fund research, made the recommendation, sold you the fund, and then placed the trade for the purchase. However, there is no good reason to pay anyone unless there is something of value exchanged, other than the mutual fund itself.

Some advisors and brokers get paid through commissions and this source of payment is meant to follow advice to the investor customer or client. Although it is possible to buy load funds without a formal client-broker relationship, there is no good reason for it.

The bottom line: In general, any investor who is doing their own research, making their own investment decisions, and making their own purchases or sales of mutual fund shares should not buy load funds.

Why Buy a No-Load Fund?

Why buy a no-load fund? You already know that you should generally buy no-load funds if you are not using an advisor. But what are other reasons for buying no-load mutual funds?

Perhaps the best reason is to boost returns by minimizing expenses.

In most cases, no-load funds have lower average expense ratios than load funds and lower expenses generally translate into higher returns. This is because the expenses to manage the mutual fund portfolio come directly out of the gross returns of the fund.

For example, if a mutual fund has a total return of 10.00% before fees and expenses and the total expense ratio of the fund is 1.00%, the investor's actual return is 9.00%. Now imagine you bought an average large-cap stock fund, which might have an expense ratio of 1.25%. An investor can easily find a no-load fund with an expense ratio of 0.75% or less. This is essentially a 0.50% return-per-year advantage over the load fund. Over time, this can mean a difference of thousands of dollars of savings and compound interest to the investor using a no-load fund.

Which is Best, No-load or Load-waived?

Should you use no-load funds or load-waived funds? This is a bit of an apples and oranges comparison. However, no-load funds generally have lower average expense ratios than load-waived funds. Lower expenses often translate into higher returns to the investor, especially over the long-term. Therefore no-loads are generally better than load-waived funds, at least in terms of lower expenses, which can lead to higher returns.

A true no-load fund does not charge any load and it does not have any fees, such as 12b-1 fees, that may seem hidden to an investor. However, load-waived funds often do charge 12b-1 fees. This way an advisor or broker who gets paid by commission can still make money without getting paid the load. How do they do this? They remove (waive) the load but keep the 12b-1 fee. Therefore load-waived funds may sound like you are getting a good deal but you need to do your research and be sure you are not buying a fund with a high 12b-1 fee.

Load-waived mutual funds are identified by an "LW" at the end of the fund name. In contrast, no-load funds do not have any letter or letters, such as A, B, C, D, R, or LW, at the end of the fund name indicating a share class.