8 Facts You Didn't Know About 'No-Load' Mutual Funds

posted on 06-07-2019

Many investors turn to mutual funds because the funds can make it fairly easy to see solid returns while maintaining a degree of diversity.

Unfortunately, there are mutual funds that come with extra charges, called loads. These loads can be costly, eroding your real returns. Choosing no-load mutual funds can be one way to reduce the fees that you pay.

However, even if you invest in no-load funds, you might not realize what you are getting into. Even no-load funds come with secrets that can cost you. Before you invest in a no-load mutual fund, here are eight things you should know:

1. You Might Have To Ask for A No-Load Fund
If you are working with a financial advisor, you might have to ask for a no-load fund. Although some financial advisors will automatically look for a no-load fund for you, some of them are paid on commission, and are more interested in getting a bit of a bump with that load.

2. There Are Still Costs With No-Load Funds
"No load" doesn't mean "no cost." All mutual funds have expense ratios. The first time I invested in a no-load fund, I ended up with a 2% annual expense ratio, which is pretty high. (I didn't know any better!) On top of that, there might be other fees, like the 12b-1 fee.

3. 'No Load' Almost Always Means 'Actively Managed'
It's not enough to just ask for a no-load mutual fund if you are looking for something low-cost. In fact, what you are probably looking for is an index fund. Index funds, almost by default, are no-load, and they have low expense ratios.

4. You're Better Off Going To The Source
Financial advisors and investment brokers might tack on other fees, including transaction fees. Going straight to Fidelity or Vanguard to purchase your no-load funds can mean lower costs in the long run.

5. Fund Managers Follow Strict Guidelines
It's important to understand that any actively managed fund, including a no-load mutual fund, comes with strict investing guidelines. Funds are managed according to rules that specify what types of assets are included. Even with open-end funds, at least 80 percent of the assets have to follow particular guidelines. For example, if you've invested in an energy sector fund and the energy sector tanks, there's not much you can do other than abandon the fund -- even the manager can't change the asset allocation.

6. No-Load Funds Don't Trade Like Stocks
Your no-load fund is bought and sold from the fund company. It doesn't matter what time you buy or sell shares. Your fund is priced according to the value of the investments when the markets close. If you want a fund that trades like a stock, you need to invest in an ETF.

7. Taxes Are Different On No-Load Funds
Just as mutual funds don't trade like stocks on the market, they aren't taxed like stocks. Instead, your tax liability depends on how the fund manager trades what's held in the fund. Basically, the gain or loss is realized based on when the fund manager makes his or her trade on the individual securities within the fund.

A fund manager might have added more shares of Company X to the fund last year. This year, the manager sells those shares at a profit. The gains are taxed, and those taxes are passed on to the shareholders. For those who invested in the fund last year, it's not so bad; they realized a capital gain. But if you bought shares of the mutual fund last month, just before the trade was made, you probably didn't realize the capital gains. However, as a shareholder, you are still taxed on the gain. This makes many mutual funds -- even no-load funds -- inefficient come tax time.

8. You Might Be Better Off With ETFs
A no-load mutual fund is better than one with a sales load. However, an index fund is often better than any actively managed fund. And if you want to avoid some of the tax inefficiencies that can result from mutual fund trading, an ETF might be your best bet altogether. You get the effect of the fund, but the ETF is traded and taxed like a stock.

The Investing Answer: Just because a mutual fund is no-load doesn't mean that it comes without cost or that it's right for your portfolio. You could actually come out ahead by purchasing ETFs from discount brokers that offer ETFs with no transaction fees and low expense ratios.

by Christian Hudspeth What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for tr...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
by Christian Hudspeth If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hote...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
by Susan Campbell Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the sel...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com. Being in credit card debt is the pits. I've bee...
by Christian Hudspeth If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But ...
by Christian Hudspeth If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
by Christian Hudspeth Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've defini...