Andrew J. Fama Asset Management, No-Load Mutual Funds

No-Load Mutual Funds:

You don't need to buy a product to get financial advice.

You may have heard the terms "no-load" mutual fund or "load" mutual fund in the financial media (the word "load" as used in this context is interchangeable with the word "commission").

A "load" fund is a fund sold through a broker or a salesperson for a commission or fee. "Load" funds may have sales commissions ranging from 3% up to 6% associated with them. "Load" funds may be "front-end" load or "back-end" load, depending on when the commission is paid to the broker or salesperson.

A "front-end" load is taken out of the investment immediately, at the time the fund is sold by the broker and/or purchased by the investor. Front-end loads are often referred to as 'Class A' shares.

A "back-end" load is taken out of the investment only upon sale of the fund by the investor. Back-end loads are often referred to as 'Class B' shares.

A fund having a "back-end" load (commonly referred to as 'Class B' shares) may charge you a hefty fee for taking your money out of the fund before a certain period of time. This discourages many investors from moving their money out of a bad investment and thus perpetuates poor returns over time.

The term "no-load", on the other hand, means that a particular mutual fund is available for purchase by you, the investor, without you having to pay a sales commission to the person or company selling you the fund.

In order to compare these differences more clearly, let's look at an illustration of a front-end load versus a no-load fund.

If you were to purchase a front-end load fund having a 5% commission, and you gave the broker or salesperson $100,000 to invest in XYZ "load" mutual fund, the broker or salesperson would be paid $5,000 and the remaining $95,000 of your money would be invested in the XYZ "load" mutual fund.
If you invested the same $100,000 in the ABC no-load mutual fund, the entire $100,000 would be invested in the ABC no-load mutual fund, since no commission is paid. Obviously, you are $5,000 ahead right from the start.
The $5,000 is not only still in your account, but will be working for you over time, presumably making a difference in your investment return over time.

Now, lets look at an illustration of a back-end load fund, also known as "Class B" shares. (By the way, much has been written in respected financial publications such as The Wall Street Journal about the questionable methods used in the sale of "Class B" shares by brokers, banks and insurance companies).

By investing in a back-end load fund, you may unwittingly lock yourself into a commission ranging from 1% to 5.75% of your investment (the commission depends on the fund itself and also depends on how long you own the fund). The calculations can become so complicated in this regard that most investors simply do not understand the implications of investing in "Class B" shares until after the fact. The perils of investing in "Class B" shares cannot be overemphasized.

At Andrew J. Fama Asset Management, we place client assets exclusively in mutual funds which are always no-load* to the client, as we are not in the business of selling commissioned products of any kind.

*Fidelity Investments may levy a nominal fee, typically $35, on the purchase or sale of certain funds known as "Transaction Fee" funds. Additionally, some fund families may include in their expense ratio a charge known as a "12b-1" fee, generally .25% or less. Each of these fees are disclosed to clients at time of purchase. None of these fees are paid to Andrew J. Fama Asset Management.