Load vs. No-load
Date Added: February,
2000
By Chris Stallman
| E-mail
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.
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.
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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