All You Need To Know About Load and No-Load Mutual Funds
“ When it comes to Finance, the devil often lies in the details.”
It is a rocky feat to come to a decision when you deal in the matters of money. People often fall in trap for sugarcoated deals that promise exponential returns. However, in order to understand how to put our money to best use, we need to first understand the very fundamentals of mutual funds.
Load v/s No-Load Mutual Funds
The first thing that you should look for in a Mutual fund is to check if it is a load or no-load mutual fund.
When you are looking for a property, you have some properties with brokerage involved and some without brokerage.
Similarly, in the field of Finance, we have mutual funds with sales charges called Load Funds and without sales charges known as No-load funds.
No-Load Mutual Funds
A no-load mutual fund is a fund in which the shares are sold without a sales charge. The investment company directly distributes the shares to the investor without an intermediary like a seller or a broker. No sales commissions on the investor’s capital ensure that the entire amount is invested into the fund.
Some of the famous companies that distribute No-Load Mutual funds include the Vanguard Group, Birla Sun Life etc.
Benefits of No-Load Mutual Funds
- Ability to maximize your investment capital: Since there are no sales charges involved, the maximum amount of your money is put for investment.
- Safety from fraudulent advisors: Not all financial advisors are your friends. Unethical advisors are looking for a way to burn a hole in your pocket in order to fill their pockets. No-load mutual funds give you the flexibility to decide and choose your own mutual funds.
Drawbacks
- No expert advice: Many companies offer experts that help you analyze your risk portfolio. When you choose your own mutual funds, you need to do your own research and be your own advisor.
The ABCs of Load Mutual Funds
There are three types of load shares in Load Mutual Funds. In the financial world, we like to call them Class A, Class B and Class C.
Let us say that you are planning to invest $1000 into 5% load mutual fund.
If the share were a Class A shares, you would only invest $950, with the remaining $50 going to the company as a commission. These types of shares are also known as front-loaded mutual fund since the charges are deducted before investing your money.
In Class B shares, the fee is charged when you sell your shares. This is why they are also known as back-loaded or back end mutual funds. An additional charge called contingent deferred sales charge (CDSC) is also charged. This charge is levied if you decide to sell your mutual fund before its stipulated time.
Consider an investment of $1,000 in a fund with a 5% back-end load that declines by 1% each year until it ends in year six.
If you decide to sell your shares in year 1, you will have to pay 5% of your investment capital. Since your investment capital was $1000, this means you will pay $50, if you decide to sell the shares in the first year. If you sell the same funds in the second year, you will pay 4% charges and this gradually keeps decreasing.
In this way, Class B mutual funds discourage investors from withdrawing their money in the short term.
Consider that you have invested $1000 in Class C shares with 1% level load. This means that you will pay 1% commission throughout the year. This means $10 will be deducted from your investment as long as you hold the fund. This expense will never go away, making C share mutual funds the most expensive for investors who are investing for long periods of time.
Brokers often recommend you to invest in Class C shares as they promise them a continuous stream of income through level loads. If you come across any such broker, ask them why they donot recommend Class A and Class B shares.
How to make most out of Load Funds
There is no doubt that no-load mutual funds are the best bet for your investment, as they ensure no extra charges. However, there are many people who prefer investing via load mutual funds as they promise the advice and insights of finance experts. Their expertise can help people align their investments to their long or short-term goals.
Class A shares
- Commission: The commission is one-time charge and not a part of operating charges.
- Best Candidates: Investors with high initial investment planning to invest for a long term. It is because the investors can avail the breakpoint discounts.
- Investment Period: Class A shares are generally used for long term investment (8 years or more).
Class B Shares
- Commission: The commission is charged when you sell your shares.
- If you sell, your shares before a stipulated timeframe, you have to pay an additional charge called contingent deferred sales charge (CDSC).
- Class B shares can eventually exchange into Class A shares after seven or eight years.
- Best candidates: Investors with lower investment capital planning to invest for long or intermediate term.
- The longer an investor holds onto the shares, the smaller the sales charge will be. If an investor can hold onto their Class B shares for a specified time, the shares will automatically convert to Class A shares.
- Investment Period: Class B shares are generally used for intermediate to long term investment.
Class C Shares
- Commission : The investor pays the mutual fund commissions via annual fees.
- Investment Period: They are generally used for short term investment (less than 3 years) since they become expensive when held for long term.
- Best Candidates: They are best for investors who are planning to invest their capital for a short term since the annual fee can compound over time.
Comparing Load and No Load Funds
The crux is that no-load funds are always almost more preferred over loaded funds. It is an obvious choice because the load funds offer lower operating expenses with no sales commissions. As an intelligent investor, make sure you read the details so that the expense ratios of no-load funds are below average.
Funds in a Nutshell
As an investor, you can choose a load fund as it offers expert advice. If you find the advisors genuine, you can opt for a load fund as the right advice can save you tons of money. On the other hand, no-load funds give you the flexibility to choose your own funds without paying any additional charges.
Before you make a decision, you should understand what a no-load mutual fund is and what a no-load mutual fund is not. After all,
Successful Investing does not involve following the herd. It involves common sense and research.
Happy Investing: )
