Why Should I choose No Load Mutual Funds?
What is a no load-fund mutual fund?
A load is essentially a commission you pay on the mutual fund. With a no-load mutual fund, you don’t have to pay a commission for your mutual fund because it is distributed to you directly from the investment company.
Load mutual funds usually charge you a percentage of your return. For example, they might charge you a 3% commission. If you make a 6% return, you only get 3%. This is an example of a back-ended fund because the commission is taken out of the proceeds. This is slightly better than a front-end fund because the fee you pay has had time to earn money. With a front-end fund, you pay the 3% up front and that money has no chance to earn any money.
From first impressions, you assume a no-load fund is superior because you don’t have to pay a fee, and most often, this is true. Think about it; if you invest in a load fund that’s making a 12% return, that’s great. It’s also more than 8% that maybe another no-load fund is making, but if the load commission is 5%, you’d still be making more with the no-load fund.
Just because it’s a load fund, doesn’t mean it will earn you more money.
With many things in life, we often think that the more it costs, the better it is. This is often not the case. In fact, some colleges raise their tuition just to get more people to enroll because they think that with a higher price, they have increased the value of their education. In actuality, they’ve changed nothing about their teaching.
Also, even with the experience and knowledge fund managers have, it is impossible for them to always find the perfect stocks that will make the most money. The stock market, or any market for that matter, is impossible to predict. While they can make predictions of what a stock will do based on the past and technical information, it’s still possible that you could choose stocks randomly from the paper and have a better return.
Financial knowledge and research will help in investing, but over the long haul, it’s very possible you will probably earn at least the same amount with no-load funds or even more, than with load funds after commissions.
What about Hedge Funds?
Many news stories have recently come out talking about hedge funds. Hedge funds are similar to mutual funds but are not subject to the same regulations as mutual funds and are therefore some investors consider hedge funds to be more risky than highly regulated mutual funds. Many investors in mutual funds would not be able to invest in hedge funds because of the high minimum net worth requirements (usually $1 million). Nonetheless, there are many enterprising portfolio managers are asking how to start a hedge fund and are finding that it is relatively easy to do, with the right legal counsel of course.
What should you choose?
Unless you are very confident in a load fund, I suggest going with a no-load fund. You will at least save some money up front.
If you are interested in furthering your knowledge of mutual funds and possible get into trading them, pick up a copy of Profitable No-Load Mutual Fund Trading Techniques: For the Individual Investor
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Where can I Buy Mutual Funds?
Unfortunately, investing is not as simple as going to the store and placing an order. Luckily, it is much easier these days than it has been in the past. For most mutual funds, you can go online and choose the right mutual fund for you.
Find a Brokerage Firm
As a beginner investor, you want to look for the most cost effective investments. On the internet, there are several investment companies that will allow you to trade stock and invest in mutual funds. Look around to find one that is trusted with excellent reviews and has features that will greatly benefit you.
Year ago, you would have had to set up an account with a brokerage firm in person. Now, investing in mutual funds or stocks is so much easier because you can do it online. Online stock trading has many benefits over a brick and mortar firm, mainly its simplicity and ease, but it can also be cheaper.
Here I have listed some of the online banks and brokerage firms that I use and that I have had success and no trouble with at all. I have been involved with both for over 2 years and have never had a problem with either. Trading stocks online is as simple and safe as it gets!
ING Direct is a trusted online bank that has had available a savings account with a high rate of return for a while now. They have recently acquired ShareBuilder an online brokerage firm. Together, they now offer mutual funds that you can invest in.
What’s great about Sharebuilder is that you don’t need to have a lot of money to start investing. One benefit of mutual funds is that you can invest a small amount and still stay diversified. Sharebuilder offers one of the lowest minimums for investing in mutual funds at $1,000. If you don’t have that much money yet, you can set up an automatic investment plan for as little as $100 until you reach the minimum.
Choose the Type of Mutual Fund
Not all mutual funds are created equally. The fund you choose will depend on how old you are and how much you are willing to risk. Sharebuilder offers several mutual funds in the following classes:
Money Market Funds
Asset Allocation Funds
Fixed Income Funds
Domestic Equity Funds
Enhanced Index Funds
Global Funds
International Funds
Specialty/Sector Funds
You can choose a conservative fund if you are closer to retirement and want to take less risk, or you can choose the growth fund if you are younger and are looking for a potentially higher return. There are also funds for large, mid, and small cap companies, a real estate fund, international funds, and more to choose from.
All you have to do is sign up with ShareBuilder. Once you sign up, you can either buy stocks, invest in mutual funds, or both. Get started now, the sooner the better!
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What is a Money Market Mutual Fund?
A money market mutual fund is not like a normal mutual fund. You don’t buy shares like you would an index fund or something similar. It is more like a savings account. Instead of buying shares, you just put whatever amount of money you want to put into it. If you have $100 you want to save, throw it in a money market fund, just like you would a savings account.
What are money market mutual funds made up of?
They contain short term debt instruments. Short term usually means six months or less. This type of fund contains short term debt instruments such as short term bonds that are constantly maturing. This is why you will not see a money market fund with a certain rate.
Money market funds report 7 day returns. For example, you might see a fund with a 7 day return of 3.53%. This is not how much you will earn in 7 days. For example, if you have $1,000 in a mutual fund earning 3.53%, you will not earn $35 in seven days. The rate is for over 1 year, so you would earn 3.53% divided by 365 times 7 which equals $0.0138. That is small, but over a year it would equal $35.
Why isn’t it the same rate all year?
The rate constantly changes because the fund in constantly earning different amounts. The investments are short term, therefore they are constantly maturing and new debt investments are being added at different interest rates.
By determining a 7 day return, investors can see how much they are earning and have a more accurate number than a year average.
Should you invest in a money market mutual fund?
A money market fund should not be used as a long term investment. It does not give a very high return for retirement or other investment goals. It is a good place to keep your cash. Often brokerage firms will keep your cash not invested in a money market account.
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