Should you invest in no-load mutual funds or funds with a load? Should you invest in no-load funds on your own or through an advisor? Before you make a decision about the best mutual funds to buy, you should understand what a no-load mutual fund is and the expenses you'll pay with the various types of mutual funds.
As is the case in nearly every investing scenario, the primary factors involved in deciding how to invest in certain types of securities depend upon the investor's financial goals and personal preferences. In other words, the answer to the question of whether you should invest in no-load mutual funds begins with a two-word answer: "It depends."
Key Takeaways
- Fund loads are fees that apply to share transactions, and can be charged either at the time of purchase, or later on when shares are sold.
- The cost of loads or fees are factored into an investor's net returns, but can be measured upfront through a fund's expense ratio.
- You can avoid paying a fund's operating costs by hiring a fee-only advisor or by trading individual shares on your own.
- No-load funds are almost always preferred over loaded funds, so long as the expense ratio is reasonable.
What Is a Mutual Fund Load?
A mutual fund load is a fee charged when an investor makes a transaction in fund shares. Loads may be charged upon purchase of fund shares (front-end load) or upon the sale of fund shares (back-end loads). These loads are paid to the broker for selling the fund (or advising an investor to buy the fund). Mutual funds that do not charge loads are known as no-load mutual funds.
Some share classes of funds may easily be confused with no-load mutual funds. Typically, class B shares and class C shares do not charge a front-end load. In other words, on the surface, it appears that if you invest in a class B or C share fund you are investing in a no-load mutual fund. In reality, you are buying a fund that carries a back-end load (contingent deferred sales charge) and higher ongoing 12b-1 fees. A true no-load mutual fund does not have a front-end or back-end sales charge.
How Much Does a No-Load Mutual Fund Cost?
How many times have we been told that there is no such thing as a free lunch? The same holds true with no-load mutual funds; nothing is free in the world of investing. No-load mutual funds may be free of sales charges (loads), but they do have costs.
All share classes of funds—load or no load—carry fees that are paid out of the fund’s assets to the fund’s investment advisors (as opposed to paying the advisor/broker who sells the fund). In other words, investors see these fees as a reduction in their net returns versus an expense on their bank or brokerage statement.
Mutual fund fees are expressed in something called an expense ratio, which is a percentage that expresses the operational expenses of a mutual fund. Fees and expenses vary greatly from fund to fund and may range from less than 0.10% to more than 2.00%, depending on the investment style, market capitalization, fund assets, fund company, and share class of the fund.
Note
To get an idea of how much the fees and expenses of a fund might eat into your returns, take a look at our list of average expense ratios for mutual funds.
Should You Buy No-Load Mutual Funds on Your Own or Through an Advisor?
Some investors prefer to invest in no-load mutual funds on their own. Each investor has their own reasons going the do-it-yourself route. The reasons vary from avoiding the cost of paying a fee to not trusting financial advisors.
Many do-it-yourself investors choose a conventional approach of buying inexpensive no-load mutual funds through Vanguard and/or T. Rowe Price. They might choose a broad-based, passively managed fund that follows an index like the S&P 500 Index. They might combine various indexes in order to build a diversified portfolio that consists of several or many portions of the market (large company U.S. stocks to small company international stocks).
On the other hand, many investors have found trusted advisors that charge a fee based on assets invested rather than charging a sales commission. Fee-only advisors are able to help investors determine a proper asset allocation based on the investor’s objectives and help them stay the course through good times and bad.
Note
Advisors that charge fees based on assets under management, rather than through commissions from sales, demonstrate that they can prioritize the interests of the investor because there is no incentive to buy or sell.
The Bottom Line of Buying No-Load Mutual Funds
Whether you buy no-load funds or funds with a load, or if you do-it-yourself or through an advisor, you should understand what a no-load mutual fund is and what a no-load mutual fund is not.
Should you invest in no-load mutual funds or funds with a load? Should you invest in no-load funds on your own or through an advisor? Before you make a decision, you should understand what a no-load mutual fund is and what a no-load mutual fund is not.
The bottom line is that no-load funds are almost always preferred over loaded funds. Just be sure that your no-load funds' expense ratios are below average.
