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Mutual Funds: Load Or No Load?

How to evaluate load vs. no load mutual funds

Mutual funds are among the best investment vehicles available for the average investor. Unlike individual stocks and bonds, mutual funds are pretty much "hands off". You do your homework, select a quality mutual fund, and then let the professional fund manager(s) handle the details. In short, mutual funds allow you to enjoy the long-term benefits of the market without the day-to-day hassles.

If you've been investing with mutual funds for a while, you have most likely faced the question of which type of fund is better: load funds or no load funds. If you're new to mutual funds, "load" simply refers to the commission paid to the broker who sells you the fund. "No load" means there is no commission to be paid on the purchase or sale of fund shares. 

Most discussions about mutual funds tend to be centered exclusively on performance comparisons between funds. Rating services like Morningstar often offer their opinion.

But rather than focusing only on performance, there are some other issues that I consider to be far more important: 

  • Who is selling which load funds and why?
  • Who markets the best no load funds?
  • Which mutual fund is right for you?
Most load mutual funds are sold through brokerage houses, financial planners, and people known as "Registered Representatives".

With very few exceptions, most of these people operate on the basis of selling as many fund shares as possible. Their commissions are collected up front, as a back end charge, or both. Mutual fund brokerage commissions are usually in the range of 5 - 6%.

Whether you make money or lose it isn't their primary concern. What matters most to these folks is how often you buy (and generate new commissions for them). 

Who markets no load mutual funds? No load funds have traditionally been marketed directly by the mutual fund companies themselves. But today, more and more funds are being offered through discount houses like Fidelity, Schwab, and a host of others. The advantage to this is that you have an unlimited choice of mutual funds in one place. You don't have to open a separate account for each mutual fund family that you purchase. 

Most fee based investment advisors (I happen to be one) have independent relationships with the major discount firms. They're able to offer clients just about any no load mutual fund that is available. They receive no commissions from the firm and only get paid by the client according to a pre-determined fee arrangement. Under this type of arrangement, there's no hidden agenda to try to sell you a particular mutual fund in order to earn a larger commission. 

So which type of mutual fund is right for you?

Whether you prefer dealing with a broker selling load funds or an independent investment advisor recommending no loads, you need to clearly understand one truism: You can make money or lose money with either type of mutual fund!

Why? Let?s assume for just a moment that there is no difference in performance between the two types of funds. Then what exactly determines the outcome of purchasing either a load or a no load mutual fund? 

The key is the advice that you get. The fact is that many brokerage houses and Registered Representatives are often more interested in their profits than in yours. Their investment advice is generally "buy and hold" or "dollar cost average", along with similar financially questionable recommendations.

Only rarely will you receive advice about when and why you should exit the market, either because of accumulated profits or to cut your losses. Getting out of the market is simply not in their best interest, though it very well may be in yours. 

I must confess that as a fee based advisor, I'm somewhat biased and I recommend no load mutual funds to my clients. I believe this type of arrangement to be the best for all parties involved. It allows me to avoid any possible conflict of interest and to work for my clients? financial benefit exclusively. And, of course, the better my clients do, the better I do. 

I'm able to select no load mutual funds and make buy or sell decisions based solely on my mutual fund trend tracking methodology. Following its signals, I'm able to get clients into or out of the market as often as is necessary to maximize profits and protect their assets.

And since I work with no load mutual funds, except for an occasional short term redemption fee, the client pays no transaction charges no matter how many times we move into or out of the market! 

If market conditions indicate that we should park the clients' capital in the money market for an extended period of time in order to avoid a bear market (as we did from October 2000 to April 2003), I'm in a position to advise that because it's in my clients' best interest. I'm always thinking about what will benefit my client instead of worrying about lost commissions on load mutual funds. 

The bottom line is that load fund vs. no load mutual fund shouldn?t be the issue at all. Having a well developed plan and reliable advice as to when to buy or sell is far more important in helping you to secure a prosperous financial future. 

Ulli Niemann is an investment advisor who has written about methodical approaches to investing for over 10 years. Visit him at Successful-Investment.com.

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