Investors with limited capital, lacking the technical expertise of securities analysis or who are unable to devote the time required for researching securities, prefer investing in mutual funds. There are many types of mutual funds and they can be differentiated by several different criteria. On the basis of the inclusion or exclusion of extra management and brokerage charges, they can be differentiated into load and no load mutual funds.
About Mutual Funds
Contrary to popular opinion, mutual funds are no less riskier than direct investments in securities. Still they have the advantage of having qualified and experienced fund managers and a diversified portfolio that reduces risk. There are many types of mutual funds, classified by the sectors in which they invest. Most of them have a portfolio that invests in stocks, bonds and other money market options, varying over a wide risk range.
Since mutual funds are professionally managed and usually sold by brokers, there are quite a bit of management and brokerage fees that an investor must pay, which eat into the returns that they generate for the investors. Mutual funds can be invested in, by purchase of shares or units at their NAVPS (Net Asset Value Per Share). Depending on the charging of these fees, mutual funds are classified into load and no load mutual funds.
What are Load Mutual Funds?
Load mutual funds are usually bought through a broker and therefore come with many types of brokerage charges. For every sale and purchase of a unit or share of a mutual fund through a broker, you have to pay him sales charges. These include front end commission and back end commission charges, plus 12b-1 charges (0.25 to 0.75% of asset value), charged for distribution.
Front end charges must be paid at the time of purchase of mutual fund shares, while back end charges have to be paid when the shares are sold. Both front end, back end and 12-b-1 charges reduce the amount of returns that an investor gains. This 'load' brings down the profit that an investor can earn over the mutual fund investment period.
What are No Load Mutual Funds?
No load mutual funds, as the name itself suggests, comes with none of the front end and back end, purchase and sales charges or arbitrage charges. The only load comes in the form of the 12-b-1 charges, which are limited to 0.25% by FINRA (Financial Industry Regulatory Authority). The reason there are no brokerage charges is because there no brokers involved. Shares of these funds are directly purchased from the parent company, which avoids arbitrage. Hence the potential for returns from a no load mutual fund is greater.
Comparing Load Vs No Load Mutual Funds
The single most important difference between a load and no load mutual fund is that the former is weighed down by brokerage charges, while the latter isn't. When a high volume investment is made in a mutual fund, the brokerage charges add up to a sizable proportion, thus limiting the profit size, right at purchase.
Ergo it makes sense to scan and research mutual funds on your own and deal directly with the management company and invest directly on your own. The only downside is that the research required to pick the right mutual funds with growth potential, need to be put in from your end, which requires devoting time and effort on your part. Of course, the higher returns on no load mutual funds, are worth the efforts put in!