No-load funds are mutual funds in which you purchase shares without paying a commission or a sales fee. As you probably know, mutual funds are a type of investment in which your money is pooled in with the money of other investments. The fund manager is responsible for buying all stocks (or other investments) on behalf of the investors.
In some cases, you have to pay for these services, typically with an up-front commission. The expense of a mutual fund is shown as its “expense ratio” or “management expense ratio” (MER). The expenses associated with a mutual fund might include paying the fund manager and other administrative costs.
With no-load mutual funds you don’t have to pay any commissions or fees. Without these fees more of the money you’ve invested is working for you.
Investing Example
As an example if you invest $5,000 into a no-load mutual fund, the full amount is invested into the fund. With a load fund that charging a sales commission (front-end load) of 6%, you are actually only investing $4,750 into the fund. If the load on the fund is “back-ended”, the commission is taken when the shares are sold. In either case, when you choose a load-fund you begin your investment at a loss.
No-load funds also tend to charge lower ongoing fees. This is because many funds with front-end loads also charge “12b-1” fees (usually 0.25%). These fees are applied to the cost of selling the funds. No-load funds that do not charge 12b-1 fees are known as “100%” or “true” no-loads.
Many professionals in the mutual fund industry argue that the fee that the investor pays for professional guidance will more than pay for itself through higher returns. There is, however, little to no evidence that supports this claim. It seems that how a fund is sold has no bearing on how the fund performs.
More Analysis on Load v. No-Load Funds
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
