No Load Funds vs. A Share Funds
The "no-load funds" vs. "A share funds" debate highlights a valid and important comparison to make before investing in mutual funds. Generally, minimizing the costs associated with investing in mutual funds is a good idea, but this conventional wisdom does not mean that share class A funds are not a wise choice for some investors.
Types of Mutual Fund Expenses to Consider Before Investing
There are several different types of mutual fund expenses. For our comparison of no-load mutual funds to A share class mutual funds, the most important types of costs to compare are the expense ratio and the sales charge.
- Expense Ratio: Expressed as a percentage, the expense ratio is the number of fees paid to the mutual fund company to manage and operate the fund, including all administrative expenses and 12b-1 fees. These expenses are not paid out of your (the investor's) pocket, but come directly from the mutual fund portfolio. For example, if a mutual fund has a total return of 10.00% during a calendar year, and the expense ratio is 1.00%, the net return to the investor is 9.00%.
- Sales Charge: Also called loads, mutual fund sales charges are expenses that either occur when mutual fund shares are purchased (front load) or sold (back load). Class A shares have front-loaded sales charges and Class B shares have back-loaded sales charges. The charges typically range from 2.50% to 5.75%. There are also C share funds that charge a "level load" that is typically an additional 1.00% ongoing fee added to the fund's expense ratio.
Although there are several types of mutual fund share classes, A shares are generally the best choice for investors who intend to hold their mutual funds for the long term. This is because B shares and C shares often have higher expense ratios, which erode at the fund's performance over time.
Who Should Invest in No-Load Funds
No-load mutual funds are ideal for investors who do not want to work with a financial professional for investment advice. Since there is neither load nor other financial incentives to sell them, no-load funds are generally not sold by stock brokers and other commission-based advisors. If the investor is not receiving investment advice, there is no good reason to buy loaded funds.
Also, investors who prefer to invest in index funds and exchange-traded funds (ETFs) should avoid paying loads or funds with high expense ratios. Since index funds and ETFs are passively managed––and assuming the investor does not want investment advice––there is no reason to pay a load for buying or selling them. All other things being equal, the index fund or ETF with the lowest expense ratio is best.
One exception to the above scenarios is in the case of fee-only planners and investment advisors that are paid only a percentage of assets under management. These planners and advisors are not paid by commission; therefore, they typically find the highest-quality, low-cost funds available for their clients.
Top reasons to invest in no-load funds
• You do not want investment advice
• You are a long-term, buy-and-hold investor that wants to minimize expenses
• You prefer index funds and ETFs to actively-managed funds
Who Should Invest in A Share Funds
A Share funds are ideal for investors who want to work with a financial professional for investment advice or financial planning. Since A shares have a front load, investors buying them should receive some kind of value in return for paying the sales charge.
It's important to note that, although the front load associated with A share funds may appear to make the fund more expensive than other loaded funds, the A share funds most often are the best choice compared to B shares and C shares. This is because the expense ratio for A shares is usually lower than other share classes (with exception of some no-load funds). Therefore, in the long run, the lower expenses can justify the upfront cost of A shares.
Top reasons to invest in A share funds
• You want to work with an advisor that gets paid by commissions
• You plan to hold the mutual fund for several years
• You prefer actively-managed funds to passively-managed funds
There are many share class types of mutual funds but the best types for most investors are either no-load funds or A share funds. Put simply, if you are a do-it-yourself investor, or an investor who wants to work with a fee-only advisor, no-load funds are the way to go. If you want to work with a commissioned-based advisor, A share funds are the smart choice.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.