Load vs. no load
The latest investment-related concept I’ve been investigating is load vs. no-load funds. Then within the load funds, there are front-end loads and back-end loads.
This is how I understand the concept: If you invest in a fund with a load, it means that you pay an additional fee. That fee is a percentage of the amount invested, and will vary from fund to fund. Sometimes you pay the fee upfront when you put your money in (a front-end load), other times you pay the fee when you take your money out (a back-end load, also known as a deferred load). The percentage paid on back-end loads may vary based on the length of time you have your money invested, and may eventually be reduced to zero.
The Google-selected TD Canada Trust web site tells me that:
A deferred load fund is a mutual fund series that has no commission to purchase but is subject to a fund company charge upon redemption. Typically deferred load charges start at around 5% to 7% in the first year, and will decline towards 0% over the next 5 to 7 years.
So why would anyone invest in a fund with a load? Here’s why I went with a deferred load fund in the past: I knew nothing about investing, and it was recommended to me by a broker. That’s probably one of the worst reasons to invest in a fund, so I don’t recommend doing that, but I imagine it’s a pretty typical reason.
If you’re planning to hold your funds for many years, a back-end load probably won’t hurt much. But if something comes up and you need to get the money out before the fees have phased out, it will cost you. Plus, funds with a load typically have higher expense ratios as well. (Which makes no sense to me, especially for funds with front-end loads.)
One of the things that I’ll be looking for when opening a Roth is that the fund be a no-load fund. I’ll also be looking at expense ratios. After all, since you’re limited on the amount that can contribute to the fund each year, there’s no sense in letting fees further reduce the amount. I want as much of my money as possible working for me.
