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Mutual Funds
No-load vs Load |
There are two different types of mutual funds,
no-load and load. Funds that don't impose a sales charge on investors are called no-load
funds. Ones that do are called load funds. Let's take a look at the two and
how they compare.
No-Load Funds
Most investors tend to favor no-load funds because of their lower expenses. No-load funds
don't impose a sales charge on investors when they buy or sell shares. Shares are bought
directly from the mutual fund at the Net Asset Value (NAV) per share, and every dollar
invested goes directly to the fund -- where it begins to work immediately.
No-load funds may not charge sales commissions, but they can charge 12b-1 fees. These
annual fees range from .1% to 1% of an investor's holdings and are used to pay for broker
commissions, advertising, and other marketing expenses. Mutual funds are required by law
to include 12b-1 fees in their expense ratios.
Load Funds
Some mutual funds impose a sales charge, or load, to investors. Loads are used to
compensate brokers, financial planners or other institutions responsible for bringing
investors into the fund. Sales charges are usually a fixed percentage of the amount
invested -- ranging from a typical 4% up to the legal limit of 8.5%. Many funds carry a
front-end load for purchasing shares, while others charge a back-end load, or redemption
fee, for shares that are sold.
- Front-end Loads: Deducted before
shares are purchased. On a $1,000 investment with a 4% front-end load you'll pay $40 in
sales charges. The total amount invested will be $960. So you're actually paying $40 for
an $960 investment, a 4.16% sales charge ($40/$960) -- a minor difference but an important
concept.
- Back-end Loads: Also known as
"contingent deferred sales charges". If they sound confusing -- they are.
Back-end loads are deducted when shares are sold. They operate on a sliding scale so the
earlier you take out money, the higher load you'll pay. The surrender fee decreases each
year until it finally goes away (between 6-8 years).
- Redemption Fees: Some funds will
charge investors exit fees if they sell shares. Redemption fees are based on the number of
shares investors choose to sell. These type of fees exist so investors are discouraged
from making frequent short-term trades. The mutual fund company may also use this money as
a reimbursement for redeeming shares (administrative costs). Redemption fees vary in
amount and usually disappear after an investor has remained in the fund over a extended
period of time.
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