There are two types of mutual funds in the market: Load Funds or No Load Funds.
There is a debate raging amongst the investors as to which is better. Load is the commission paid to the broker selling the fund. “No load” means no commission is paid on the purchase or sale. Many financial advisors and rating services concentrate exclusively on performance comparisons. But there are other more crucial questions that should be answered, instead of just looking at the performance:
1. Who sells load funds and why?
2. Who sells no load funds?
3. How to select the right one for you?
Who sells load funds and why? Many load funds are being sold by brokerage houses, financial planners and Registered Representatives. Excepting few, many of these sellers earn commission on selling the product and more the product sold, higher the commission they earn. They earn up front commissions, as a back end charge, or both (around 5 - 6%). They are not bothered if you are making money or not. They are simply bothered about how frequently you buy, thus letting them earn more commissions.
Who sells no load funds? No Load funds are sold directly by the mutual fund companies or, nowadays by the discount houses like Schwab, Fidelity, etc. The benefit of this is that you have infinite selection of funds under one roof and need not open different accounts for every mutual fund family in which you want to invest.
Most fee based investment advisors have independent relationships with larger discount firms and can offer clients any available no load mutual funds. They do not get compensation from the firm and are paid by the client at an agreed fee arrangement. Due to this arrangement, there is no ulterior motive in selling you a specific fund or attempt to sell more so as to earn bigger commission.
How to select the right one for you? Whether you want to go for load funds or no loads, remember: You stand to make or lose money either way! This is because you may not get the right advice, provided both the types of funds show comparable performance. The fact is most brokerage houses and Registered Representatives are more concerned about their profits instead of yours. Their investment advice generally consists of Buy and Hold or dollar cost averaging and other financially doubtful advices. Very rarely, you will get advice about when and why you should sell, either because you have earned good profits or should restrict your losses. Exiting the market does not suit them, though it may be right for you.
No load funds are best for all the parties concerned. It prevents any conflict of interest and allows the advisor to focus solely on the welfare of their clients.