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Mutual Funds: No Load vs. Load

by Ben Bontekoe
  • Overview

    Because of their simplicity and ability to provide exposure to several types of investments or areas of the market at once, mutual funds can play an important part in your investment portfolio. But mutual funds, like all investments, come with a variety of charges and fees, which can differ greatly between funds. Sales charges and other fees are listed in a fund's prospectus, and you should consider these carefully before deciding to purchase a fund.
  • The Facts

    Mutual funds can be divided into two categories--those that have sales charges, known as load funds, and those that don't, no-load funds. Load funds justify the charges by promising higher returns than no-load funds. But no returns are guaranteed, and load funds might not outperform no-load funds by a significant margin--load and no-load funds often provide similar returns over the long term.
 
  • Types of Load Funds

    Load funds are divided into classes, according to when loads are paid. Class A shares carry a sales charge when you purchase the fund--known as a front-end load. Class B shares carry a back-end load, charged when you sell your shares. These charges usually decline the longer you own the fund until they disappear completely.
  • Benefits

    The obvious benefit of no-load funds is that you get to invest more of your money. If you purchase $1,000 worth of shares in a Class A fund with a 5 percent load--$50--you have only $950 invested in the fund. While this may not seem like a great amount, it cuts into your returns over time. A back-end load will lower your ultimate return from the fund.
  • Considerations

    While a no-load fund may seem the best choice, a load fund offers the benefit of the knowledge and expertise of a financial adviser or broker. New investors unfamiliar with the market, those who have trouble making investment decisions or people too busy to properly research potential investments may feel more comfortable paying for the advice of a broker.
  • Warning

    Just because a no-load fund has no sales charge, it isn't entirely free of fees. All mutual funds regardless of class pass along the expenses of managing the fund to investors through a charge called the expense ratio. These expenses can include anything from rent, salaries and utility bills to advertising and marketing. Marketing expenses can be passed on through a 12b-1 fee. A fee that includes no sales charges and a 12b-1 fee of up to 0.25 percent of the fund's assets can be called a no-load fund. Fund's expense ratios can vary widely.

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