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Load vs. No-Load
Date Added: September 1st, 2005
Article provided by TeenAnalyst.com
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Recently, we received an e-mail from a young investor who wanted to invest in a mutual fund but didn't know what the terms "Load" and "No-Load" meant. These terms are very important for investors, especially young investors, so we're going to cover this topic for you.
All mutual funds carry fees that you must pay in order to invest in the mutual fund. These fees usually cover the expenses that the mutual fund has. No one likes to pay fees when they invest but it is necessary in order to keep the mutual fund running.
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Loads
One type of fee is called a "load". This is a fee that you have to pay on top of all the other fees. These fees are usually pretty high, about 3-5% on average.
There are two types of loads: front-end loads and back-end loads. A front-end load charges you a fee on what you invest. For example, if you wanted to invest $500 into a mutual fund with a 5% load, the mutual fund would take out $25 and you would get to invest the rest. A back-end load is a fee that you pay to take your money out of the mutual fund. For example, if you wanted to take $1000 out of a mutual fund with a 5% back-end load, you would have to pay $50 just to do so.
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No-Load Mutual Funds
In the 1990's, no-load mutual funds started to become very popular. As their name suggests, these are mutual funds that don't charge you large fees in order to invest in them. They still have a couple small fees but not nearly as much as load mutual funds carry.
Why You Should Invest In No-Load Funds
For young investors, investing in no-load mutual funds is very important. Our time horizon is much longer so investing in no-load mutual funds helps our money compound more. Here is an example of how much of a difference there is:
Jimmy invests $500 in fund A which has no loads and earns 13% per year. Johnny invests in fund B which has a 5% front-end load which earns 13% per year. Neither of them touch the money until they retire 50 years later. Jimmy's mutual fund is now worth $225,367 and Johnny's mutual fund is now worth $214,099. So, as you can see, Johnny earned $11,268 less just because his mutual fund had a 5% load.
We urge you to invest in no-load mutual funds because young investors are those who have the most to gain from them. One excellent no-load mutual fund that you should take a look into is the Pax World Balanced Fund.
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