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No-load funds are mutual funds that do not charge investors sales fees or commissions. When an individual purchases shares of a no-load fund, the entire purchase amount goes towards the investment. For example, if the individual puts $5,000 into a no-load fund, that entire $5,000 is invested. Not a single penny is spent on paying a commission or sales charge.
Load funds are the direct opposite of no-load funds. In a load fund, the seller of the fund shares, often a broker, receives a load. The term load refers to the sales commission paid to the seller.
The individual, group, or company responsible for the management of the fund does not receive a load. Therefore, a load has no real ability to encourage a fund manager to do a better job. Instead, a secondary party benefits monetarily for assisting the investor in buying shares of the fund.
If an investor chooses to purchase a load fund instead of a no-load fund, he is actually choosing to give away a portion of his money. For example, if an investor decides to invest $10,000 into a load fund that charges a five percent commission, that investor is actually paying $500 for the privilege of investing. Only $9,500 of the original $10,000 is actually invested. No-load funds don't require this loss of investment money.
No-load funds may also offer investors higher returns, depending on the particular fund. For example, if one investor purchases $5,000 worth of a no-load fund with a ten percent return and another investor buys the same amount in a load fund with a ten percent return, the investor who chooses the no-load fund receives a higher return. The no-load fund purchase would grow to $5,500. Assuming the load fund requires a five percent sales charge, it would grow to only $5,225. With numbers like these, no-load funds make better sense for many investors.
Sometimes, load funds are promoted with the idea that the investor will be able to recoup the sales commission through the returns provided by the work of the fund manager. According to studies involving fund investments, however, the opposite is often true. In fact, many studies show that no-load funds actually outperform those that charge a load.
When you purchase a load fund, you begin your investment at a loss. To avoid this, many individuals choose to purchase no-load funds on their own or through brokers. There are literally thousands of no-load funds from which to choose.
You may also want to include C shares in your discussion. C shares also charge no front end load. They may, however, have a 1% for 1 year backout fee. (In other words, if the client sold the fund before holding one year there would be a 1% charge.) The annual fees are higher on C shares than no-load funds. However, if you compare an A-share (the typical front end fee share class) purchase versus a C-share purchase, the difference in the annual fees take anywhere from 4 to 7 years to make up for the front end fee on the A share.
Since many clients do not stay in funds for more than 3 years before trading, the C
share can be a better deal (as loaded shares go). The other issue to consider is that when you buy a no load fund, the investor is left to do the research. Many investors prefer that way. The annual fees on loaded funds are essentially consultant fees.
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