What are no-load mutual funds?

what are no-load mutual funds

No-load mutual funds are mutual funds whose shares are sold without a commission or sales charge by fund houses. The reason for this is that the shares are allocated directly by the investment company, instead of going through a secondary party. This is the direct opposite of a load fund, which charges a commission upon the initial purchase and also at the time of sale.

No-load mutual funds vs others

Since there is no cost for you to enter a no-load fund for any purchase, all of your money is working for you. If you purchase $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the mutual fund

On the other hand, if you buy a load fund that charges a commission of 5% upon any purchase, the amount actually invested in the fund is $9,500. If both funds return 10%, the no-load fund would have grown to $11,000 while the loaded fund only rose to $10,450 due to mutual fund loads.

Both Funds performance

The main idea behind a load mutual fund is that you will make up what you paid in commissions with the solid returns that the managers will provide. However, most analyses how that loads don’t outperform no-loads.

Most no-load and load mutual funds are sold through mutual fund brokerage houses or apps, certified financial planners, and people have known or unknown as “Registered Representatives.” With very few exceptions, most of these people function on the grounds of selling as many fund shares as possible. Their commissions are collected upfront, as a back end charge, or both at the time of purchase and sale. Whether you make money or lose it isn’t their primary concern for the fund house. What matters most to these folks is how frequently you buy (and develop new commissions for them).

Mutual funds brokerage House and Apps

No-load mutual funds have traditionally been marketed directly by the mutual fund companies themselves. But today, more and more mutual funds are being offered through discount brokerage apps like Groww, Zerodha, Niyo, HDFC, ICICI, Upstox etc. The advantage to this is that you have an unlimited choice of mutual funds (with load and no-load funds) in one place. You don’t have to open a separate account for each mutual fund family that you purchase for any terms.

Most fee-based investment advisers have independent relationships with major discount firms or brokerage apps. They’re able to offer clients just about any no-load mutual fund that is available in the stock market. They receive no commissions from the firm and only get paid by the client according to a pre-determined fee arrangement by fund houses. Under this type of arrangement, there’s no hidden agenda to try to sell you a certain mutual fund in order to earn a larger commission.

Types of Charges funds other than no-load mutual funds

It is best to stick with no-load or low-load funds, but they are becoming more challenging to distinguish from heavily loaded funds. The use of high front-end loads has dropped, and funds are now turning to other kinds of charges. 

Some mutual funds sold by brokerage firms’ apps, for example, have lowered their front-end loads to 1%, and others have introduced back-end loads (delayed sales charges), which are sales commissions paid when exiting the fund within 1 year. In both instances, the load is often accompanied by an annual charges fee, in India i.e around Rs 250 – Rs 1500 by different apps and fund houses. 

On the other hand, some no-load mutual funds have found that to contest, they must market themselves much additional aggressively. To do so, they have introduced charges of their own as hidden.

Also Read: What is the Power of Compounding in Mutual Funds

The result has been the introduction of low loads, redemption fees, exit and annual charges. Low loads- up to 2% – are sometimes added rather than the annual charges. In addition, some mutual funds have instituted a charge for investing or withdrawing money.

Redemption fees

Redemption fees work like back-end loads in mutual funds: You pay a percentage of the value of your mutual fund when you get out. Loads are on the amount you have invested already, while redemption fees are calculated against the value of your total fund assets. 

Some funds have a sliding scale (decrease or increase) redemption fees so that the longer you remain invested, the lower the charge when you leave. 

Some funds use redemption fees to demoralise short-term trading, a policy that is designed to protect longer-term investors. These funds normally have redemption fees that disappear after six months.

Annual Charge

Probably the most confusing charge in any fund is the annual charge, the 12b-1 plan. The adoption of a 12b-1 plan by a fund permits the adviser to use mutual fund assets to pay for distribution costs, including advertising, distribution of fund literature such as prospectuses and annual reports or charges, and sales commissions paid to brokers. 

Some mutual funds use 12b-1 plans as masked load charges: They charge very high rates on the fund and use the money to pay brokers to sell the fund. Since the charge is annual and based on the value of the total investment, this can result in a total cost to a long-term investor that exceeds a high up-front sales load. 

A fee table is required in all prospectuses to explain the impact of a 12b-1 plan and other charges.

Fee Table

The fee table of any funds makes the comparison of total expenses among funds easier. Selecting a fund based solely on expenses, including loads, redemption, exit and charges, will not give you optimal outcomes, but avoiding mutual funds with high expenses and unnecessary charges is important for long-term performance.

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