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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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Getting Started in Stock Investing and Trading
  • Are No-Load Funds Always A Better Deal? 0 comments
    Jul 5, 2013 9:07 AM

    One of the primary advantages in mutual fund investing is its simplicity compared to owning stocks - or so some investors believe. It's true that professional management, diversification, and the ease of reinvesting earnings, are all great advantages. But when you pick one mutual fund over another, are you sure you are getting the fund that offers the lowest fees?

    All professionally managed funds charge a management fee, and that is typically about 1.5% of annual net asset value. But beyond, this fee charged by all managed funds, a range of other fees - some obvious and others less so - can also be charged. The best-known of these fees is the load, which is a commission taken from funds invested to pay a salesperson.

    The comparison between load and no-load funds is not as straightforward as it seems at first glance. A "load fund" is one charging a load, or sales commission. This is applied either up front (taken out of investment dollars) or as a back-load, assessed upon sale of shares; this fee may also be called a "redemption fee." A no-load fund does not charge a sales commission of any kind.

    That is simple enough; but there is more. Some funds, including many so-called no-load funds, charge fees under different names. To make a truly valid comparison, you need to understand what those fees are and how expensive it is to own shares of a no-load fund. Among these fees, one of the most audacious is called the 12b-1 fee. This is a fee charged to investors to pay for promotion of the fund, to attract new investors. It may range between 0.25 and 0.75 percent of asset value every year.

    No-load funds that do not charge 12b-1 fees are call "true no-load" funds. The fee may seem like a small percentage, but over time, it adds up to a significant difference in investment outcome. So a 100% no-load earning 9% annual net return per year yields $295 per $1,000 [1] after three years. With a 5% front-end load, the same investment yields only $230 per $1,000. [2] When you take out 12b-1 fees every year, it can drastically reduce your real return even with compounding. In other words, 9% is not always 9%, because fees and the timing of their assessment change what you really earn.

    There are more fees as well. Funds, load and no-load, may assess "custodial" or "managerial," or "administrative" fees. So a fund advertising itself as a no-load may end up paying salespeople through assessment of a fee with a different name. If those fees are collected every year and based on your net asset value, they will add up to much more than an up-front load charged for the same commission.

    With the many names given to fees, making accurate comparisons is complex. But there is help. The Financial Industry Regulatory Authority (finra.org) offers a free mutual fund fee analyzer that compares the overall cost structure of different funds. Link to this free calculator at apps.finra.org/fundanalyzer/1/fa.aspx - and remember, a sales load by any other name is still a sales load.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one recently released.

    I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Weekly Newsletter I look forward to having you as a subscriber.

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