What is a No-Transaction-Fee (NTF) Mutual Fund?
A no-transaction-fee (NTF) mutual fund refers to mutual funds that do not charge trading fees for the transactions made. They are also known as no-load mutual funds. Investors can buy and sell the shares of a no-transaction-fee mutual fund without paying sales commission, which is favorable to them. The number of no-transaction-fee mutual fund providers is continuously growing. Examples of some of the fund providers and brokers include Vanguard, Charles Schwab, and T. Rowe Price.
- No-transaction-fee (NTF) mutual funds refer to mutual funds that do not charge trading fees when transactions are made.
- Transaction fees are sales commissions (sales load) paid to third-party brokers when a transaction is made. It discourages speculative and short-term trading.
- No-transaction-fee mutual funds benefit investors with lower investment costs.
Mutual Fund and Transaction Fees
A mutual fund is an investment instrument that contains a diversified portfolio with equities, bonds, and other securities. It provides investors with opportunities to invest in portfolios managed by financial professionals in small amounts with low costs.
Mutual funds typically charge fees from investors, including sales commissions, redemption fees, exchange fees, account fees, and purchase fees. Some of the fees are one-time costs, and some are changed when an action is taken. Transaction fees usually refer to the sales commissions and/or purchase fees.
A sales commission (also known as sales load) is paid to a third-party broker every time a buy or sell transaction is made. It is usually calculated as a percentage of the transaction value. A front-end load is charged at the time of purchase, and a back-end load is charged at the time of sale.
Sales load discourages speculative and short-term trading, which helps to protect long-term investors. Frequent trading also lifts the liquidity requirement for a fund and may lower the return. The fund needs to hold large amounts of cash on hand for transactions instead of making investments.
Despite its benefits, sales load, as a cost of investment, lowers an investor’s net return. The funds that charge lower or no transaction fees are generally more favorable to investors. Especially when transactions are made in large values, it can make a big difference.
How NTF Mutual Funds Work
No-transaction-fee mutual funds are funds that do not charge any sales commission. Typically, investment firms distribute NTF mutual funds to investors directly instead of through a third party. It avoids the third party’s charge of sales load.
As investors are seeking investment opportunities with lower costs, more and more brokers are also starting to offer NTF mutual funds. Charles Schwab and E-Trade are two large brokers that offer NTF mutual funds.
No-transaction-fee mutual funds benefit investors with lower investment costs. Let’s assume there are two mutual funds and each generates a 10% return for one year. One of the funds is an NTF mutual fund, and the other one charges a 3% front-end load. If an investor invests $100,000 in the NTF mutual fund at the beginning of the year, the value will be $110,000 at the year-end.
If the investor goes for the load fund, he will finally get $107,000 ($110,000 – $100,000 * 3%) in his account after paying the 3% sales load. The load fund generates a net return of 7%, lower than the 10% of the NTF mutual fund.
The absence of sales commissions in a no-transaction-fee mutual fund does not mean that there are no other fees or charges for that fund. Mutual funds also carry operating fees, e.g., for example, management fees, incentive fees, custodial fees, and so on. The fees are usually charged on an annual basis.
When evaluating their total investment costs, investors also need to take the fees into account. Additionally, investors should make investment choices based more on their risk tolerance, investment horizon, liquidity requirement, and many other factors, but not just on investment costs.
Examples of a No-Transaction-Fee (NTF) Mutual Fund
The Vanguard Group – the world’s largest provider of mutual funds – offers wide choices of no-transaction-fee mutual funds. Most of the Vanguard mutual funds are offered by its brokerage unit, Vanguard Brokerage Services, without commission fees.
Some of its funds carry special purchase/redemption fees to cover high transaction costs, as well as discourage frequent speculative trading. Vanguard Brokerage Services also offers some NTF mutual funds from other companies. For such funds, online orders are free, but fees may apply to the orders made by phone in some cases.
ClearBridge Aggressive Growth Fund consists of a portfolio of companies with high growth potential. The maximum sales load of the fund reaches 5.75%, but it offers different levels of discounts.
There are several options for investors to purchase the fund free from transaction fees. Some discount brokers offer the fund without charging transaction fees. Charles Schwab does not charge a sales load on investments above $100 through its brokerage platform in the fund.
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