Load Vs No-Load Mutal Funds - Cull Out Your Fund Perspicaciously
Most investors generally obliterate some essential inherent attributes of investing in a mutual fund. One of the primary factors that one should look into while appraising a fund is the expenses of the fund. The load expense is the price that an investor pays towards the sales and distribution commission, custodial fees and managerial fees.
Asset management companies charge a ‘load’, which is generally a charge levied to the investor to recompense the company for the sales and distribution charges that are borne by it. Additional charges such as the administrative and fund management expenses are requited through the expense ratio. This ratio is generally a percentage of the assets of the fund.
There are various types of Mutual fund structures. A load fund may charge a
a) Front-end Load (class A shares) - Levied during purchase
b) Back-end Load (class B shares) - Levied during redemption, or
c) Constant Load (class C shares)
These expenses generally vary from 3-6.25% in case of front-end load and 3% in case of back end load. All load funds additionally may charge annual distribution expenses (12b-1 fees) of between 0.25-0.75% of annual asset value.
A no load fund may also charge annual distribution expenses but may also be 100% load free- implying 0 expenses.
Custodial and Managerial fees are often recovered as a percentage of the assets of the fund. These may be levied additionally on a load or no-load fund, and are generally overlooked by investors whilst investing. These expenses could often run higher than the load itself, and are best avoided.
All the expenses mentioned above eat into the return on investment, diminishing the income in the hands of the investor. Nevertheless, this does not imply that a no-load fund will necessarily outperform a load fund. It is basically a function of the net annual returns. A load fund with much higher annual returns, may prove to be a more prudent investment as compared to a no-load fund with lower annual returns. No-load funds carrying ‘above average’ rankings from Morningstar and Lipper, might even at times outperform load funds of the same fund category and investment horizon.
At the same time, one must look into these factors and choose a fund, as their might always be a cheaper alternative fund available with the same/similar investment objective. Therefore, do a little perusal and invest wisely!