To understand the advantages of no-load mutual funds, you have to understand how mutual fund fees work. While many financial advisors will push you to invest in a load mutual fund (one that will pay them a kickback fee because they sold this particular financial product), no-load funds don't require you to pay a fee up front or when you sell, so more of your money can go toward investing.
How Mutual Fund Investing Works: Mutual funds are actively managed. This means a fund manager or a team of managers makes the decision in which stocks and what percentage of the investment will go to which stocks, bonds or other investment entities. There are a variety of mutual funds available, some heavy in stocks, some in bonds, some in international funds: The possibilities are almost endless.
Of all these different kinds of mutual funds, there are two categories regarding what fees are charged: load or no-load mutual funds.
Loaded mutual funds charge you a certain percentage depending on if the fund is a category A series, B series or C series. The rating of the mutual fund is tied to past performance and many other characteristics of the fund. With a loaded fund, you either pay the full amount up front or pay a partial amount up front and the rest when you sell. This load fee is in addition to and separate from the transaction fee. Portions of this load fee may go to the broker who sold you the mutual fund or financial advisor who sold you the fund. No-load mutual funds do not charge any upfront or closing fees, just the transaction fee.
Top Two Advantages of No-Load Mutual Funds
Fewer Fees: Some advisors will tell you to invest in no-load mutual funds because you save all that money that goes to fees, but others say the load funds are superior funds that will make up the difference of the load fees paid. You need to look at the fund's past performance and take everything in context.
Less Chance of Being Led Astray by Unethical Financial Advisors: The biggest reason to avoid load mutual funds and to go with no-load funds is to avoid being steered towards a particular mutual fund just because the fee derived from the loaded mutual fund is going to line your advisor's pockets. Check with your advisor to see if he has a vested interest in selling you a particular load fund. If your advisor will get a percentage of the load fee, obviously he has a reason to steer you toward investing in that mutual fund, whether it is truly in your best interest or not.
Whether you go with a load fund or a no-load fund, verify the performance record and fees charged of any mutual fund with an independent organization like www.Morningstar.com before you invest.
Do you know about common mutual fund disadvantages? While mutual funds can work out well for investors, they can have a down side if you don't do your homework.