It is widely accepted that the safest form of playing the stock market is to invest in mutual funds. These funds draw from the stock of a lot of Blue Chip companies and thus automatically diversify your portfolio with one move. When investing in a mutual fund there are two ways to buy funds, load or no-load.
The difference in these two types of fund is commission. Load funds require them whereas no-load funds do not. There are many different structures this fee can take. The most common type is front-end payment, where in addition to buying into the fund itself you pay your broker a direct fee ranging from three tow six percent of the amount bought. Less often used is a redemption fee where you pay your broker a similar percentage when selling the funds.
It is the job of brokers and other salesmen to try to sell you as many extras as you are willing to buy, the same as the car salesman will pounce on you for extra fees associated with the car you want to buy if he senses a weakness, fees that in fact are not vital and exist just to inflate the profit margin as much as possible. This is the nature of the game. The fact is that there is no reason to buy a loaded mutual fund.
This is all complicated by the fact that loaded funds are not always labeled as such. Since they charge in a variety of ways it can be hard to pinpoint the difference in all the fine print. One tip is to look for funds marked “Class A” or “Class B” or any class with a letter attached to it in the title. These are invariably loaded funds. You should always research the fund yourself and if there is any doubt in your mind ask your broker for the answer point blank because they are forbidden by law to lie to you about this issue.
When you have to pay a six percent fee you start at a loss compared to other investors. Over time this loss can break you financially. If you started a one hundred yard race would you really want to start six yards behind the line?
There are exceptions to this rule, albeit rare. The brokers try to convince you that loaded funds outperform no-load funds over time but there is much research that prove the opposite to be the case. No-load funds that have better than standards averages rankings from Lipper (or Morningstar) almost always outperform load funds in identical categories over a three year period!
Since the commission has nothing to do with the management of the fund there is no reason to buy these at all. You do not get rights denied to people who use no-load funds. There is no tangible difference and thus these fees are corporate malfeasance of the worst sort.
By sticking with no-load mutual funds you avoid unnecessary fees and start out at the optimal position. Brokers are already rich so why further pad their pockets if you do not have to? This is just a way in which the industry takes advantage of the uninformed. Now you know better.
References:
www.scottrade.com/mutual_funds/index.asp
www.mutualfundinvestor.net
http://biz.yahoo.com/funds/ir_mf2.html