What Makes a Great No-Load Mutual Fund?

First, we need to answer the question, “what is a mutual fund load?”

A mutual fund load is simply a commission charged to an investor when an investor buys or sells a mutual fund through a broker. These commissions may be applied upon the purchase of the mutual fund (front-end load) or upon the sale of the mutual fund (back-end loads).   So, as a mutual fund with a load is a mutual fund that pays a commission to a broker, conversely, a no-load mutual fund is a mutual fund that does NOT involve a broker and does NOT pay a commission.

First, it is significant to note that mutual funds may be alike in every other way, except for the load that may or may not be attached to the fund.  They may have the same manager and contain the same company stock.  The only difference being the pricing structure of the fund itself.  Mutual funds with loads are purchased at a cost called public offering price.  Mutual funds without loads are purchased at a cost called net asset value.  Again, the difference between the two is the commission paid to the broker.

Most mutual fund companies offer both a no-load version and a loaded version of the same fund.  And, generally, there is no difference between loaded and unloaded mutual funds (except for the pricing structure.)  And, since almost all funds have a no-load version, the question to ask is not, “what is the best no-load mutual fund?”  Instead, the questions to ask are:

1. What is the best mutual fund, and
2. Should I buy it without a sales charge?

What is the Best Mutual Fund?

To answer this question, one needs to look at multitude of factors including:

• Mutual Fund Expense Ratio.  These are mutual fund administrative expenses that are embedded within the value, or price of the fund.  Less expense to the investor means higher returns.
• Volatility.  Volatility reveals how much variation there is from the "average" of returns generated by the fund.  The lower volatility, the better.
• Manager’s Tenure.  This factor looks at the length of time the manager(s) have been at the helm of the mutual fund.
• Historical Returns.  Looking in the past doesn’t help us predict how well a fund will perform in the future, but mutual fund shoppers should stay clear of dreadful long-term historical performance.  Note; don’t get too caught up in last year’s returns.  Look at long-term historical performance instead.
• Fully Invested Cash.  An owner of a mutual fund should want his or her fund to be fully invested, with little in the way of cash reserves.
• Diversification.  It is generally a good idea to stay away from sector funds.  Choosing one sector over another reduces the diversification and increases risk.

After reviewing most mutual funds, one could eliminate 95% of the mutual fund universe from consideration.  There are approximately 8,000 mutual funds, and there are only a few that are worth owning.  Most are too expensive, have very little manager tenure, or have extremely poor historical returns.  

How Can I Buy a Mutual Fund Without a Sales Charge?

After making certain that a mutual fund excels in each of the above areas, then the method of purchase will determine whether a fund is loaded or not.  

For example, if you were to purchase the 6th largest fund in the world, American Fund’s famous “Growth Fund of America,” you would be able to purchase it in one of two ways.  

You could go to your local broker and pay what is called the public offering price.  This higher price would reflect a “net asset value” plus the commission needed to pay the broker for the sale.  Or you could go to your favorite online discount broker, and simply pay the lower net asset value price.  Net asset value is simply the cost paid without any brokerage commissions.

As an aside, I must say that using a broker (and paying a load) is not always a horrible idea.   A good commissioned broker may save you from disaster, which could save thousands.  I may in the minority on this issue, but most investors aren’t as skilled as the local broker in terms of what makes a good mutual fund.  Remember, only you know your level of competence when it comes to investing.  Only you know if you need help or not.  

If you find a good mutual fund, and you want to buy it without the help of a broker, here’s how you do it.  Go to a discount brokerage company such as Scottrade, TD Ameritrade or TradePMR.  Open up an account, deposit the funds needed to buy the fund and buy it yourself.  Each of the above mentioned discount brokerages has an easy-to-navigate website that makes the process virtually painless.  Call the discount brokerage that you choose to do business with and ask questions.  That’s what they’re there for.

 

Open an account with a Discount Brokerage Company and Hire 401kFundAdvice to Help You Purchase Your Mutual Funds!