Finance: A No Load Mutual Fund Explained

A brief description of no-load mutual funds.

You've received that big bonus you've been waiting for, or perhaps you expect a sizable tax return you'd like to put to work for your financial future. The stock market is where many have made their fortunes, but individual stocks require research that you haven't the time for, and you would rather begin your investing with some built-in diversity. Mutual funds have been quite popular, but you want to avoid the sales charge. What is available to meet that need?

One avenue open to those who have decided on investing in mutual funds, but are turned off by the sales fees, are no-load funds. When you purchase a mutual fund, companies often charge a sales fee, which is, more or less, a commission paid to the sales staff. Sales fees can be as high as 8 1/2 % of the value of the investment which, when calculated for thousands of dollars in investment principal, can equate to quite a lot of money that will no longer be working for you. No-load mutual funds are no different than loaded funds, but don't charge any sales fees. There are an increasing number investment companies offering this type of product to investors, with a diverse selection of funds to choose from.

While the benefit of not having to pay a sales fee up front can be significant, the prospective investor should be aware that funds do not operate for free, and should pay careful attention to other expenses. There are other non-sales related fees that you will have to pay, and they will be deducted from the funds assets, which includes your investment capital. Costs such as redemption fees, purchase fees, account fees, and exchange fees can all be charged to you to defray the administrative costs of the funds and erode your investment gains. Fortunately, the Securities and Exchange Commission, or SEC, limit the amount that can be charged in these fees, and it typically does not exceed two percent of the principal.



Every mutual fund is overseen by an investment advisor, who is also paid by the shareholders in the form of a percentage of fund assets, listed under management fees. The SEC sets limits for the amount of this percentage and will vary between funds.

Another fee which can be found in the prospectus is the 12b-1 fee. From the 12b-1 fee, marketing expenses, sales commissions to brokers, advertising and other miscellaneous administrative costs are deducted. The National Association of Securities Dealers, or NASD, imposes limits to these fees of .75 percent.

When initial inquiries are made to a mutual fund company, broker, or investment advisor, you will receive a prospectus. The prospectus is a legal form of disclosure to potential investors, which provides all legal information as well as fee costs. This document should be utilized fully by the investor to better understand the amounts to be deducted from their capital. All fees and commissions are delineated within its pages, and should be completely understood before committing your hard-earned money.

It should be understood that all mutual funds include administrative and management fees, not just no-load funds. The percentages can vary significantly from company to company and should be fully disclosed in the prospectus. Funds should be considered primarily for their investment merits, but associated costs which will impact the overall return should also be factored in early in the selection process.

As you can see, no-load mutual funds can save you a great deal of money by not deducting a considerable amount in sales charges. But, as with any investment vehicle, caveat emptor, or buyer beware, should always remain in effect.

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