What is the main difference between loaded funds vs no load funds? One word: Commissions! There are two types of load funds you should know about:
1) Class A shares (front end load) usually has a sales charge of around 5% and expense ratio around 1%.
2) Class B shares (back end load) has no sales charge when you buy shares, but when you sell them during the first 5 years. If you redeem your shares in the first year, you will pay a 5% sales charge. In year 2 it drops to 4% and in year 3 it drops to 3% and so on. So after the 5th year, you pay no sales charge on redemption. However, Class B shares have higher expense ratio around 2%. Class B shares automatically become Class A shares in 8 years.
No-load funds has no sales charge, but usually have higher expenses. There is no service, no agent, no manager, so no one is getting paid. Since there is no manager, a no load fund will attempt to copy whatever the S&P 500 does. There are many load funds that can outperform the S&P and there are many that can't.
Are no-load funds always better than loaded funds? The answer is no. Neither one of them have any advantage over the other. Over time, the returns on a load fund and a no-load fund are about the same. However, if a load fund has a historical rate of return of 15% and the no-load fund of the same category has only 9%, then load fund is clearly the one you should pick. But if both load and the no load fund earn 10%, then a no-load fund is the better choice.
In summary, a load fund has a portfolio manager that does the research and find out what companies to invest in. A no-load fund will invest in steady companies (companies that been around forever) and will attempt to copy whatever the S&P 500 does. You really have to compare them in the same category to find out which one is better. For example, if you want high growth in your investments, you will pick mutual funds that is focus on generating high growth. Then you will compare whether a load fund or a no-load fund is better. You can only do this when you obtain a prospectus.
What should you look for in the prospectus?
1) What is it's investment objective?
2) Who manages the fund and how much experience does he/she have? Be careful of companies that advertise how the fund perform in its entire history.
3) Check the past performance over 3-year, 5-year, and 10-year period.
4) What is the expense ratio and management fees?
5) What is the turnover ratio?
