What Is a No-Load Mutual Fund?
A no-load fund is a mutual fund that's shares are sold without a commission or “load”. It is unlike a load fund, where sales charges are incurred either on the date of purchase or sale of the fund.
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How A No-Load Fund Works
A mutual fund is considered to have no-load as long as it does not charge sales fees. This doesn’t exclude the fund from charging purchasing and redemption fees, as long as the proceeds go to the fund itself instead of an intermediary.
What Are ‘Loads’ & Why They Exist
The securities industry experienced deregulation of commission charges in the 1970s incentivizing competition in the mutual fund space. A load is a type of commission to compensate the broker or financial advisor for helping investors select funds based on risk preferences and investing goals.
There are different types of loads that different mutual funds charge, contingent on the class of share purchased:
- A front-end load is a sales fee charged on the date of purchase of the mutual fund. It is a one-time fee deducted from the initial deposit and paid to intermediaries such as brokers or financial advisors. It is generally between 3% and 6% of the deposit. This is generally associated with class-A shares.
- The back-end load is the fee charged on the date of redemption of the mutual fund and deducted from the profit or principal at the sale of the fund. It is also known as the contingent deferred sales charge. This is generally associated with class-B shares.
- The level load is an ongoing annual charge.
No-Load vs. Regular Mutual Funds
A no-load fund boosts investor return by minimizing fees. While no-load is generally perceived as no sales charges, some funds have provisions that the investor needs to hold on to the fund for a specified period (usually five years) to not pay a fee.
The rise in demand of low-cost exchange-traded funds, coupled with a larger percentage of financial advisors charging fees have made traditional mutual funds (with a load) almost extinct. An ever-increasing percentage of mutual funds purchased by investors are no-load funds.
Other Mutual Fund Fees
In the search of lower fees to boost return, a mutual fund investor should also look out for recurring fees, outlined in the expense ratio of the fund.
The expense ratio is obtained by dividing the fund's annual operating expenses by its average net assets. These fees include the salary of fund managers and employees, and a 12b-1 fee that pays for marketing and promotional expenses, up to 0.25% of the fund’s average annual assets.
Additionally, the expense ratio of a fund includes fees that are less obvious than loads. These fees are deducted from the fund’s total value on a regular basis instead of being itemized on an investor’s statement. It is expressed as a percentage of the fund’s average net assets. For example, if the expense ratio of a fund is 0.5%. This means that an investor pays a $5 fee per year for every $1,000 invested.
Other charges under a no-load fund can include:
- Redemption fees
- Exchange fees
- Account fees
All these fees are detailed in the fund’s prospectus, a legal disclosure document that the fund must file with the Securities and Exchange Commission.
Advantages & Disadvantages of Buying a No-Load Fund vs. a Load Fund
Advantages
- No sales fees and commission associated with the purchase and sale of the fund, leading to higher returns.
- Avoid dealing with financial advisors who recommend certain load mutual funds because of undisclosed financial relationships or dealings with those funds.
Disadvantages
- Some mutual funds with a load may be high performing and worth it. This is rare in modern times but theoretically can happen.
How To Tell If a Fund is No-Load
To determine whether a fund is no-load, obtain the fund’s prospectus or contact a financial professional. Also, obtain the fund’s marketing literature that details its investment objective, performance history, and fee structure. Major financial websites offer investment tools such as a mutual fund screener to help the investor look for funds with specified criteria, such as no load.
Bottom Line
A no-load mutual fund does not charge sales fees or commissions for the purchase and sale of its shares. With all of the investor’s capital invested in the fund, the potential for attractive returns is greater since the cost of investing in the fund is lower. Because of this, mutual funds charging loads have fallen out of favor with investors.
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