Load Mutual Funds Disadvantages
The debate about which funds are better, the no load or their loaded counterparts, is certainly one that will not end up soon. Even though the differences between the two types are numerous, many writers try to narrow them down to the case of who wins from the deal: the investor or the broker.
It will be too unserious to claim that you will be always better off if you invest in load free funds instead of parking your money in a loaded counterpart. For instance, you will certainly accumulate more gains from being part of a top performing mutual fund than in a modest free of load fund. In today's information age it is just inexcusable not to search yourself for other opportunities. Being a well informed investor eliminates the need of the services of a broker, who will do something which you can do, but for free. The media provides tons of information and alternatives that simply wait to be discovered. It makes the role of the broker unnecessary, which can be interpreted as a plus since often the interests of the broker are in a conflict with those of the investor.
Here are some of the reasons why you should avoid purchasing loaded funds.
- No benefit from the load fees.
A load represents the fees that are paid to a salesman, who has succeeded in persuading investors to put their money in a specific mutual fund. The money you pay in the form of a load does not reach the fund manager or the investment advisor. It goes directly to the pocket of the salesmen. Investors pay the cost of managing the fund no matter whether they pay loads or not. Generally, the loads vary from 0.5% to 1% of the assets of the fund, but in some cases they may be more than 1.5%.
- No difference in returns.
It has been proven that over the long run there is no significant difference between the performances of all load free mutual funds and loaded ones. The only difference is the commission that should be paid to the salesmen. As a result, fund results differ for specific periods, but the general pattern remains one and the same in the long run.
Nevertheless, broker commissions have a significant impact. The situation is further worsened by the development of many types if loads. These varieties are justified by some as presenting more alternatives to investors, whereas others defy varieties as a way to mislead potential investors.
- Loads have no impact on the mutual fund performance.
Remember that loads play no role in the performance of the mutual fund. They are just a commission that you pay to a broker to find the parking place of your money instead of you. Brokers do the "dirty" work, which is inexcusable to do it yourself since there is enough information about mutual funds and their activities. Even though you will save some time from having to do the research and paperwork by yourself, this "convenience" will be too costly in the long run since you will end up with less money in your deposit account. It is relatively impossible for the loaded mutual fund to catch up with the load free fund due to such factors as compounding.
- The load paid annuls the benefits
If we accept the statement that around 95% of investment results are accounted by asset allocation, than as little as 5% are left in return of having the appropriate fund governed by the right manager. These five percents annul the potential benefit, which you might have if you have done the work by yourself.
- Lost investment resources.
By paying the specified load you deprive yourself of additional operating money, which immediately start to work for the salesmen, but not for you.
- Higher real loads than stated.
Remember that the stated amount of the load is always less than what you actually pay. This is due to the fact that effect of the commission that you pay builds up in the long run.
- Unexpected need of money.
When you purchase a loaded fund you make a commitment that you invest for long term gains. Thus, when you are in an urgent need of money, you may not be able to withdraw them. Try not to believe the salesmen that the incurred cost, represented by the paid commission, will amortize in the long run.
- Proficient managers are very mobile.
You may be convinced by the salesman that paying the load is justified, since s/he will manage to find you the best fund manager. But entering a loaded mutual fund just because of its expert manger is a risky movement, since good mangers are the ones who get many new job offers. So, you may end up in a situation in which the manager moves to another loaded mutual fund. Going after him/her may not be a good action since you will have to pay a load a second time.
- Brokers may intentionally advise you to buy a poorly performing mutual fund.
It has been proven by some studies that brokerage houses perform worse than independent loaded funds. But brokers are motivated to put you in such a position since many of them are awarded with exotic trips and other privileges. In such cases, try to make your broker to offer you non-brokerage managed mutual funds. In this way you increase your chance of getting a more objective management.
- Higher expenses
Generally, by investing in a no load mutual fund you will be charged less for the fund's expenses. Under the term "expenses" we mean those expenses that are generally taken out of the funds' assets. This is done no matter whether the investor pays loads or not. Even though the expense may be presented as an insignificant, it accumulates year after year, thus decreasing your long run gains.
Hopefully, we have managed to convince you that investing in a loaded mutual fund is less lucrative that doing so in a load free fund. These are only some of the drawbacks of the loaded mutual funds, but they represent the most fundamental ones you should always bear in mind.
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