In the mutual fund world, investors have two basic choices when it comes to fees. You can invest in front-loaded funds through an investing advisor who receives a commission. Or you can choose a no-load fund you buy yourself without paying a commission.
Both types can be part of a strong portfolio—as long as you're educated about the pros and cons of each. No Commission, but Still Not Free With no-load funds, you must keep one extremely important distinction in mind: No-load means "no commission," but it does not mean "no expenses."
No-load funds charge annual maintenance fees that are often higher than the maintenance fees front-load funds charge. Take a look at this comparison of two real-life growth funds in the same category. They invest in some of the same large, well-known, profitable companies like Apple, Google and Amazon.
Loaded fund
Investment of $10,000
Front-load – 5.75%
Minimum investment – $250
Expense ratio – 0.71%
10-year cost projection – $1,407
15-year return – 8.14% |
No-load fund
Investment of $10,000
No front-load/commission
No minimum investment
Expense ratio – 1.83%
10-year cost projection– $2,092
15-year return – 3.51% |
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Don't Think Short Term It's true that you would pay $575 on a $10,000 investment in the loaded fund, and that's a big mental hang-up for many investors. But when you're investing for the long term, you have to think long term. As you can see, over the course of 10 years, this no-load fund, like many others, will cost you much more than the loaded fund. Paying for a Valuable Service You can also think of your loaded funds' commission as "ledge insurance." When the stock market and your mutual funds drop in the next market cycle, your advisor will be there to talk you off the ledge and get you out of panic mode.
Studies show that investors who buy only no-load funds and invest without an advisor cash out of their investments twice as much as loaded-fund investors. That locks in their losses and increases their chances of missing out on growth when the market rebounds. Some Free Advice From Dave If you plan to invest like Dave and include both loaded and no-load funds in your portfolio, remember these tips: - Paying a commission to invest in a mutual fund isn't a rip-off. Just make sure you're getting the advice you're paying for.
- Pay close attention to no-load funds' expense ratios, which are a measure of how costly their fees are. An expense ratio higher than 1% is considered expensive.
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