No Load funds vs Load Mutual Funds

When it comes to all things financial, there are two basic camps. One camp refuses to pay for anything, and expects everything. The other camp expects everything, and is willing to pay to get it. So which camp is right?

There is no right way of thinking or wrong way of thinking; people have valid reasons for being in both camps. I tend to be a fee guy, and maybe that is because I was one to those counting on Fees, point’s commissions, and the spread. Perhaps if I was not an insider in the industry I would feel differently, but I do think my stance is valid.

Let’s begin with fees charged in purchasing mutual funds. There has been a debate on this subject for decades and probably will go on for a few more of them. No fee people will tell you that there are enough mutual funds out there that you should never have to pay any fees. As you may have guessed, I disagree with those folks. When I go to buy a mutual fund, whether it is for me, or a client I am not out there looking to avoid paying anything, I am out there looking for highest net returns for the risk I am willing to take. So, what does that mean?

What it means is, if I am looking for a high rated bond fund, then I am going to look for the one with the best returns after fees and expenses. It also means I am going to compare apples to apples. It is so common for people who are comparing different funds, to make a mistake and end up comparing apples to oranges. That of course leads to a bad decision that could have been avoided.

Not all bond funds are alike. Just like equity funds there are many different types to choose from depending on the amount of risk you are willing to take to get the returns you are looking for. Take for example; you are looking for a bond fund that returns in the neighborhood of eleven percent. You may get that, but not from a high rated fund with double and triple A debt in the portfolio. You would have to choose a high yield (junk) bond fund with a wide range of BB to D rated bonds. So, you can get what you are looking for, but maybe not at the risk you are willing to take.

Once I am sure the bonds I am comparing are apples to apples rather than to grapes, then I can do a real comparison. Not all the holdings need be the same; rather they should be of the same risk. Now when it comes to the difficult question of paying a load or not, you have to examine the funds total returns after expenses, fees, and loads, or lack thereof. Your total return that I am referring to is NAV appreciation with dividends paid out. Then of course I have to factor out any load, fees, or expenses occurred from owning the fund. Then, and only then can I know the answer to the question should I be buying load or no load funds.

This is where a heated argument ensues. One camp will tell you never pay a load; there are plenty of no load funds that you should never have to pay that front load. The other camp is gonna be telling you to just compare the net returns, and that is the way to go.

You have probably figured this out by now that I am firmly in camp B, and I have sold both load and no load funds, so I think I can see each side more clearly than most. If the total return from the no load fund it the highest, and the funds are truly similar, then I would be a fool too buy the load fund. On the other hand, if the load fund winds up having the highest net return why would I bother with the no load?

Let’s look at it this way. Say the difference is a percent, which equates to a thousand dollars a year in total returns, but you have to pay 450 dollars to get it. How long would you pay 450 dollars if In return I gave you a thousand back? I’d never stop paying the 450.00. However, there are plenty of people who would settle for a thousand dollars less if it means they have to pay a little to get it.

The bottom line for me when picking a mutual fund is this. When comparing apples to apples, I will always go with the fund that puts more net dollars in my pocket. After all, are we not here to make money? Think about this the next time you are looking to purchase shares in a mutual fund.

In the mean time, happy reading and happy investing.