How To Evaluate Mutual Funds


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Load or no-load? That is the question.

These would likely be the immortal words of the Bard if he were living today as an investment broker. There has long been quite a bit of disagreement regarding whether load or no-load mutual fund are the way to go.

Some of the conventional wisdom says that there is no such thing as a load mutual fund that doesn’t have an equal and opposite no-load mutual fund that is just as good if not better than its counterpart.

To hear many investment brokers tell it, with the possible exception of commodity mutual funds, conventional wisdom is more or less right on the money... so to speak.

The Difference Between Load and No-Load Mutual Funds

Load mutual funds are primarily sold by sales professionals who, with all due respect, typically don’t have a great deal of experience with or in-depth knowledge of investing since their training is in... well, sales. It is not in investing.

That is not to say they don’t know anything about investing but their knowledge and acumen therein is usually very limited relative to someone who has spent their career specializing in investing in general and in mutual funds in particular.

So what exactly is a load mutual fund? The “load” in load mutual fund is simply a sales commission and is typically in the neighborhood of around 5% of the total amount the investor is paying for the fund. If you don’t want to pay a commission, go with the no-load variety.

You will be choosing your mutual funds on your own, but at least all of the money you put invest will actually go toward the fund.

Beware of Brokers’ Vested Interests

When it comes to load mutual funds, sales pitches aside, when considering investing, investors need to consider the advice they are being given in conjunction with the amount of the load.

Any salesperson without the background of a genuine investment professional may be giving out advice that had limited or even no value.

Investors that feel they require advice should strongly consider selecting no-load funds that are in line with their individual needs and goals.

Pick a Fund That’s Right for Your Strategy

When choosing the mutual fund, whether it is load or no-load, there are some important factors to keep in mind.

The first is to develop an understanding of the investment style and objectives of a particular fund. This requires research to determine what kinds of stocks or bonds the fund holds. Does the fund manager have any restrictions? In what kind of economic climate will the fund likely see the most success? Answering these kinds of important questions requires an understanding of the asset allocation of the fund as well as knowing its underlying holdings.

Also, what are the fund’s expenses? When it comes to mutual funds and ETFs, there is an expense ratio to consider. These are factors like overhead, profit, stocks and bonds, salaries, etc. that the fund likely incurs.

Some funds may be worth the extra cost but it is up to you to make that determination. And therein lays the load vs. no-load controversy. Do you have enough knowledge and background to make that kind of determination on your own or do you feel you need to hire help?

The answer to that question could mean the difference between mutual fund success and failure.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds , Investing Ideas

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