If you’re doing your best to stick to a balanced diet, your refrigerator probably contains a healthy range of food and beverage items: some milk, some juice, some fruits and veggies, and perhaps some condiments to tie everything together.
Why should your investment portfolio be any different?
While every investor is different, diversification is a universal concept. No matter your investing goals and objectives, you’re likely to benefit from a well-diversified, regularly rebalanced portfolio, San Francisco financial advisor Daniella Rand.
Most diversified investment portfolios include mutual funds, which are essentially professionally managed baskets of equities.
Like investment portfolios or (hopefully) your home refrigerator, mutual funds are quite diverse. For novice investors, one distinction is particularly important to understand: the difference between load and no-load mutual funds. In the following sections, we’ll contrast these two types of funds and discuss how you can determine — in consultation with your financial advisor — which is appropriate for your needs.
What Fees Do Mutual Funds Charge?
First, let’s take a closer look at the types of fees mutual funds may charge investors.
- Management Fees: These fees cover the fund’s administrative costs, including overhead expenses not directly related to day-to-day management of the fund and compensation for the professionals charged with managing the fund.
- 12b-1 Fees: These fees cover costs associated with marketing and distributing the fund. They’re included with management fees in the fund’s expense ratio.
- Load Fees: A mutual fund load is a type of sales commission charged at purchase (front-end loads), sale (back-end load), or on an ongoing basis (level load).
Mutual fund investors may also pay transaction fees on purchases and sales of mutual funds. These fees are generally levied by brokerage firms, not the mutual funds themselves. Look for no-transaction-fee (NTF) funds, which waive these fees.
What Are No-Load Mutual Funds?
No-load mutual funds are mutual funds that don’t charge sales loads of any kind. While all mutual funds charge management fees, and many charge 12b-1 fees, these fees — collectively denoted by the fund’s expense ratio — generally cost less to own on an annualized basis than load funds.
Benefits of No-Load Mutual Funds
With the crucial caveat that every investor is different and any investing decision is best made in consultation with a licensed financial advisor, no-load mutual funds may offer some key benefits:
- Lower ongoing cost of ownership
- No upfront charges, other than transaction fees (if levied)
- No charges upon sale, other than transaction fees
- Easy-to-understand pricing
Bear in mind that some no-load funds charge hefty management fees. Before purchasing shares in any fund, thoroughly review its fee structure.
Know What You’re Getting Into
Understanding the difference between load and no-load mutual funds is a crucial early step in constructing an investment portfolio that helps you achieve your goals and objectives, but it’s not the only bit of knowledge with which you’ll want to arm yourself as you set about implementing your financial plan.
If you’re unsure how to proceed, consult with an experienced financial advisor with the tools and expertise to guide you through the next phase of your financial life. Knowledge is power, after all — why not turn to a partner who has it in spades?