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No Load Mutual Fund Preference

In 1924 the first mutual fund was created by Boston investors. Then, they pooled together the resource they had available, which achieved a great success, giving example to the rest of the financial world. Having recognized the benefits and the many opportunities that such a money accumulation provide, in the decades to come the mutual fund field expanded to include trillions of dollars in assets. Mutual funds allow small investors to take advantage of compounding by following a dollar cost averaging plans in systematic manner.

The pool of mutual funds is so wide and deep that it may be difficult to choose which one will best work for you. That's why we are here - to guide your way through the best investment options in the mutual fund field.

First of all you should remember that there are mutual funds that charge a load. The latter represents a fee that usually amounts to 5% of assets and goes directly into the pocket of the broker that has attracted you to the purchase of shares of the mutual fund under consideration. In case you are setting a portfolio, you should try to avoid paying loads at all means. This means that you should concentrate your resources to no-load mutual funds.

The Reasons

A simple example will show you how a small percentage of a load can significantly harm your future profits.

John has just graduated university with honors and his family has rewarded him the sum of $50,000. John decides to invest that amount but unfortunately, he is not familiar with the hidden traps of loaded mutual funds and puts this money in one of them. As a result he is charged 5.8% sales load, which is paid to the broker who has done his work in attracting John to the mutual fund. Thus he ends up with $47,100 in his account. If he has chosen a no-load mutual fund, the $50,000 would have started immediately to make profits for him.

The following table follows John's account through the years comparing it with what it would be if he invested in a no-load mutual fund. These calculations are made on the basis of a return of 12%.

Year No-load mutual fund Load mutual fund
1 56,000 52,752
5 88,117 83,006
10 155,292 146,285
15 273,678 257,805
20 482,315 454,340
25 850,003 800,703
30 1,497,996 1,411,112

As a result of his lack of experience, 25 years after his investment John decreased his potential returns with almost $50,000 (amount as big as his initial investment). Only 5 years later that sum is $86,883 - an amount which he otherwise would have saved if he has chosen a no-load mutual fund.

We guess that you don't want to be in John's shoes! So, remember: No-load mutual fund investment is always better than a loaded fund investment.

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