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| No-Load Fund |
What It Is:
A no-load fund is a mutual fund that does not charge a sales commission to
investors. Shares of no-load funds are purchased directly from the fund
companies rather than through brokers.
How It Works/Example:
Let's assume you make a $10,000 investment in the XYZ Company mutual fund, which
is a no-load fund. In order to reach $11,000 in value after one year, the
no-load fund must generate a 10% return. However, if the fund had a 4% back-end
load, the investor would have to pay a $400 fee upon the sale of the investment
($10,000 x .04), and the fund would have to generate a 14% return in one year to
create the same $11,000 value.
Why It Matters:
Loads discourage investors from frequently trading their mutual fund shares, an activity that requires mutual funds to have considerable amounts of cash on hand rather than invested. Generally, however, a load is considered payment for the broker's expertise in selecting the right fund for the investor. Notably, there is considerable controversy about whether loaded funds perform better or worse than no-load funds.
Mutual funds must disclose loads and other fees in their prospectuses, and it is important to understand that the absence of a load does not mean that the fund does not charge other fees. Thus, when comparing investments, investors should be careful to evaluate all fees associated with an investment, not just the size of the load. Additionally, the nature of the investment, the investor's risk tolerance, and the investor's time horizon should always be considered when evaluating any investment.
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