Mutual Fund is one of the most popular means of investment. Now the question arises what is a Mutual Fund? A Mutual Fund is an investment method in which people deposit their money with large fund management companies to buy securities like bonds, stocks etc. Various fund managers are appointed by these companies to take care of the investments of the depositors.
Mutual fund companies provide the service of fund management to the investors. Another question that pops up in the mind is “What do these mutual fund companies earn out of it?” Mutual Fund companies charge a fee for the services provided by them. The fee charged is called as “Load”. On the basis of the charging of fees the mutual funds can be divided into two categories:
- Load Mutual Funds
- No-Load Mutual Funds
An Investor can compare best mutual funds on the basis of the fee charged and select the mutual fund with maximum benefits.
Load Mutual Funds: In this kind of mutual funds, the investor is charged for purchasing mutual fund as well as a sales fee. The fee charged to the investor can be Entry Load or an Exit Load. As the name itself suggest Entry load or fee is charged at the time of entering the scheme. The entry load in India is generally a flat fee of 2.25% of the investment value. However, this fee has been scrapped by SEBI since 2009 when mutual funds are brought online or through direct applications. The major reason behind this is, in both the cases there are no intermediaries. Exit Load refers to the fee which is charged at the time of withdrawing the scheme. The fee is charged when the investor withdraws the scheme within 1 year from the date of investment. Different mutual fund companies charge different exit fee from its investors. This fee ranges between 1-5%. Hence, it is very important for the investor to compare mutual funds fee charged by various firms and select one with the best results.
No Load Mutual Funds: In these kinds of mutual funds the Company doesn’t charge any fee on the amount invested. These means, that whatever amount is invested by the depositor, the entire amount is invested in the purchase of securities. No-load funds have higher expense ratio than the load funds as they have to spend more on marketing, advertising and distribution of the mutual fund. A load is only a small part of the expense that the investor has to pay for managing mutual funds. In some cases, banks and other firms charge a fee when they provide service for third-party mutual funds. In case of No-load mutual fund, firms charges fees in form of exchange fees, redemption fees or account fees.
Mutual Funds are highly beneficial. It’s a good way of investing hard earned money as in this money is invested in diversified securities. Moreover, in mutual funds, a professionally competent manager manages the portfolio of the depositor. There are thousands of mutual funds available in the market. Selecting the one which suits the needs and requirement of the investor is not an easy task. The investor should take time to compare mutual funds offered by various firms before taking any final decision. The load is just one factor; the investor should also compare mutual funds on basis of returns, fees and, taxes.
Points to remember while comparing mutual funds on basis of load or unload:
1. The investor should select a mutual fund which fulfills the needs and requirements of the investor. Mutual funds cannot be bought or sold in the open market like bonds or shares. They can be traded only through the mutual fund company. Hence, it is important to get the complete information about the mutual fund company. This information can easily be found online or via company’s brochure. An investor should find as much as information possible regarding the mutual funds and then only should make the investment.
2. Compare mutual fund information and details. The first thing to consider while comparing mutual funds is the investment objective. It is very important that the investment objective served by the mutual fund load or unload should match with the investor’s requirement. The investor can select the mutual fund which suits best to the investor’s needs.
The second important thing to compare is the fees and other expenses. It is important to compare the total fees an investor has to pay for both loads as well as no-load funds. These charges vary from company to company. The investor should also check the entry load fee as well as exit load of the mutual fund. Other fees which need to be checked includes exchange fee, redemption fee, purchase fee, account fee, management fee or other expenses fees. In some cases, the sum total of the fee charged is more in no-load funds than the load funds.
3. Compare mutual fund performance. People invest in mutual funds to get better earnings on their investments. Hence, the performance of the mutual funds is the most important thing to consider while selecting the best mutual fund. This can be done by comparing the past performance of the mutual funds. Other factors to consider while comparing the performance include taxes and principal risks. It is always advisable to not to go by last one-year performance. Mutual fund investments are market-oriented; hence the results may vary on a year to year basis. It is better to consider the performance for last 5-10 years. This will give a better picture of the mutual fund performance.
Load, as well as no-load mutual funds, has their own pros and cons. In load mutual funds, the professional take care of the investor's money. As a result, the investor gets the professional financial advice for the investment. For some investors the professional expertise is worth every penny they spend via LOAD. Moreover, for investors who don’t have time or knowledge to look after their investment, buying Load mutual funds is a good option. However, in case of No-load mutual fund offers better returns as the entire amount invested by the investor, is used for buying the securities, making these funds, more cost-effective.
As Mutual Fund Investment deals with the depositor money, it is advisable to compare mutual funds and then make the selection.