When it comes to investing in mutual funds, fees matter. Many investors want to know if the fees they are paying are reasonable. A viewer named Keith tweeted me this question. He asks: "Why purchase loaded mutual funds with high fees but good reviews compared to no-load funds and good reviews?"
Here's the big difference between loaded mutual funds and no-load funds.
No-load funds are those that you can buy and sell without paying a sales charge. Load funds carry sales charges and are typically available to those who invest with a broker or financial advisor. It's true that your overall investment costs will generally be lower if you go the no-load route.
But Christine Benz, author of the "Morningstar Guide to Mutual Funds," claims frugal investors should not automatically shun load funds. "If you're not comfortable putting together an asset allocation plan, selecting specific funds and monitoring that portfolio, then paying an advisor or broker to do it for you can be money well spent, even if it means paying a sales charge to buy or sell," she said.
Certified financial planner Ivory Johnson of Delancey Wealth Management said all things being equal, loaded mutual funds have several disadvantages that are important to consider relative to no loads. First, the load reduces your initial investment. Second, since you've paid "extra," you're less likely to sell if it performs poorly. And if you do sell and want to avoid another sales charge, you'll have to exchange within the same fund family.
Excessive mutual fund costs can be a serious drain on returns, so know what you are buying—and how the sales charge works—ahead of time. Fees and loads are predictable and permanent, "but they can be controlled by prudent fund selection," said New Jersey-based certified financial planner Jeffrey Christakos. He added that "a fee-based financial advisor can help introduce clients to low-cost passively-managed mutual funds. Exchange-traded funds can also help to reduce the overall cost of the portfolio as well."
Johnson, who is a member of the CNBC Financial Advisors Council, also pointed out that loaded funds only have to be "suitable" at the time of the sale, and the advisor has no ongoing requirements. No-load funds are likely sold by a fee-based advisor who has a "fiduciary standard" that requires him or her to maintain a suitable portfolio to meet your investment goals and risk tolerance as long as you are a client.
That's why you should "carefully scrutinize any sales charges you pay," Benz said. "Grill your broker about why you're paying the type of sales charge you're paying."