No Load Mutual Funds
Mutual funds earn profits by investing the funds of the investors into a set of stocks in the stock market. This portfolio is constantly monitored and stocks are sold and bought regularly. Mutual funds incur transaction charges for buying and selling the stocks. The net asset value is determined each day based on the prices of the stocks held at the end of each day duly accounting these transaction charges and other expenses. A qualified investment professional manages these funds.
Most of the mutual funds charge commissions, or entry loads and exit loads. The justification for entry load is that they cover the transaction charges. In the initial stages the first set of investors would have absorbed these and other expenses. Moreover they take more risk by joining at that stage. As more and more investors start joining the fund, the initial burden of the first few investors gets reduced. Effectively, by paying the entry load, the new investor in the fund is sharing the costs and reducing the burden of the first investors and compensating for the risk taken.
The justification for exit cost is that mutual funds do not impose any restrictions on a person investing and getting out. But everybody knows the portfolio of shares held by a mutual fund because there are regulations that require such disclosure. Many of the shares may have been held for longer period, and are just beginning to flare up on the bourses. This makes it possible for some people to come in with large sums of money and liquidate at an opportune time. Effectively, they can skim away the profits, while the long term investor feels helpless and cheated. To prevent such deprivation of profits to right investors, an exit load is imposed so that investors who come into the fund do not leave with all the profits overnight.
Apart from the above explained entry loads, mutual funds are allowed to charge almost 1 percent of NAV towards marketing and distribution. This is referred to as 12b-1 fees. There are mutual funds that do not charge any entry or exit loads, but collect such fee. They are technically no load mutual funds but not truly no load. In truly no load mutual funds no such charges are collected.
In No load mutual funds the entire investment of the investor is converted into units. This is possible because they are able to eliminate transaction charges. When returns are low or the stock markets are going through bad phase these funds outperform the mutual funds with exit and entry loads. However, as financial times improve, other mutual funds start performing better. Therefore, no load mutual funds may be ideal suited for a period of financial difficulty.