Why You Should Buy No-Load Funds!

By: Sachin A
Submitted: 2007-01-17 16:16:37
Print this article | Tell a friend | For publisher | Social Bookmarking
Rating:
 

Load is defined as the fee or the commission that an investor pays to a mutual fund at the time of purchasing or redeeming the shares of the mutual fund.

If the commission is charged when the investor buys the shares, it is known as a front-end load. On the other hand if the commission is charged when the investors redeems his shares, it is known as a back-end load.

Certain funds apply back-end loads only if the shares are redeemed within a specific time period after being bought.

The argument for applying loads on mutual fund transactions is that these loads will discourage investors from trading frequently in mutual funds. If the investors quickly move in and out of mutual funds, the funds have to maintain a high cash position to meet these redemptions, which in turn decreases the returns of the funds. Also frequent trading means the expenses of the mutual funds go up.

There are various arguments against load funds:

-The fees that the mutual funds collect as loads are passed on to the fund brokers. The loads do not provide any incentive for the fund manager for better performance of the funds. In other words, a load fund has no reason why its managers should perform better than those of no-load funds.

-In the last few decades, no difference has been seen in the returns of load and no-load funds (if the loads are not considered.) When the loads are considered, the investors of load funds have actually gained less than the investors of no-load funds.

-When a sales person knows that he is going to get a commission from a load fund, he tends to push the load fund more - even when the load funds are performing poorly as compared to no-load funds.

-Loads are understated by mutual funds. If an investor invests $1000 in a fund with 5% front-end load, the actual investment is only $950. Thus his actual load is $50 in $950 investment - a 5.26% load.

If an investor is already invested in a load fund, it doesn’t make sense to exit now. The load has already been paid for. The hold or sell decision should now only be based on what the investor thinks about the future performance of the fund. In a few funds, the exit load depends on the period for which the fund was held.Check the details of the fund prospectus for more information.

In most cases it is better to avoid load funds; however, investors should keep one thing in mind. Sometimes load funds can be a better choice than no-load funds. For example, an investor has a choice of two classes in a fund - class A and class B. Class A has 3% front-end load and Class B has no load. The investor however misses the fine print, which states that Class B has 1% 12b-1 annual fees.

If the fund will make 10% gains each year, its return in Class A (starting with actual amount invested $970) will be

($970) X (1.10) X (1.10) X (1.10) X (1.10) X (1.10) = $1562

For Class B, the returns will be

($1000) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) X (1.10) X (0.99) = $1532.

Thus the above example is an exception, where in the long run, the load fund will perform better than the no-load fund (with 12b-1 fees).

The fact is that a no-load fund cannot be considered a true no-load fund, if it charges fees from it's investors in the form of 12b-1 and other fees.

Sachin A is a freelance writer. To read more interesting articles on mutual funds and finance visit http://www.articlemanual.com

Article source: Expert Articles

Most Recent Articles in Stocks Mutual Funds category

  • So You Really Want To Trade Online - By: Terry Detty
    This is a good overview for those of you who are thinking about testing the online trading waters.
  • How To Learn Short Selling With TIM - By: Terry Detty
    This interesting phenomenon that is called short selling is not something that every American believes that they should be doing.
  • Carbon Emission Trading, The Basics Explained - By: Dwayne Strocen
    The Kyoto Protocol of 1997 was signed by 38 signatory countries to address the issues of greenhouse gasses and resulting climate change issues. The following article will provide an understanding of trading greenhouse gas emissions.
  • Using Technical Analysis To Manage Risk And Maintain Top Quartile Performance - By: Dwayne Strocen
    To manage an effective risk management solution requires more than the calculation of VaR. Ultimately a successful risk management program requires the execution of an effective hedge. Technical analysis is a vital element of this strategy.
  • To Sell a Stock or Hold--When Is it Time? - By: Dr. Winton Felt
    Should you use the strategy of the long-term buy-and-hold investor or the short-term sell tactics of the trader in order to lock in small gains? Let us look at a few alternatives and possibly a strategy.
  • The Probability of a Stop Loss Being Triggered - By: Dr. Winton Felt
    Sometimes there are no obvious regions of price support that can be used as a reference for placing a stop loss. However, by using a volatility-based stop loss, you can set your stop so that it is statistically improbable that it will be triggered by a stock's normal fluctuation within a given holding period. This can give a stock enough "wiggle room" to continue its climb without a high risk of a premature sale because of a non-significant lurch of the stock.
  • Trading Veteran Reveals Must Have Hints and Tips on Trading that Every Trader Should Know - By: Philip Birchley
    Your trading system is a set of rules that you have built up that should be met before you enter a trade. The more ways that a trade is confirmed- the better and the more money you're likely to make.You might wait for a certain pattern to emerge on the charts that indicates that you should trade- so you might find a buy signal for example.
  • Should You Step into Foot Locker? - By: Dennis Biray
    With the NBA and other sport seasons flaring up this autumn, you may be wondering if now is the perfect opportunity to purchase shares of Foot Locker (FL), especially since they will be releasing earnings shortly (November 19, 2006). While such may be said as a good deduction, there are other, more profound reasons and answers to this question which, may, unfortunately, delay or even abort your decision to carry on your purchasing intentions. While all the economic and fundamental analysis may signal a strong run for this company, the technical analysis side of these indicators weighs much more heavily in a stock like Foot Locker.
  • 7 Stock Market Tips You Can't Live Without - By: Joseph Harris
    Every day there are a dozen new HOT stock market tips that guarantee your financial success. Every day there are hundreds if not thousands of people that jump on the bandwagon, and every day, each of those people are disappointed.When it comes to popular stock market tips, there is no golden ticket to striking it rich.
  • The Basics of Investing in Stocks and Shares - By: Joseph Kenny
    Stocks can be considered a tool for building wealth, as they are a part of almost every investment portfolio. They represent the ownership of a company and are bought in the form of shares. Shares refer to the stock of a particular company.