What is a no-load fund?
A no-load fund is a mutual fund in which shares are sold without commission or selling fees. This absence of costs is explained by the fact that the shares are distributed directly by the investment company, instead of going through a secondary correspondent. This absence of sales charges is the opposite of a fund with sales charges, whether entry or return charges, which takes a commission at the time of purchase or sale of the fund. Additionally, some mutual funds are level-fee funds where fees continue for as long as the investor owns the fund.
Understanding a no-load fund
Because there are no transaction fees to buy a no-load fund, all the money invested works for the investor. For example, if an investor buys $10,000 of a no-load mutual fund, all $10,000 will be invested in the fund.
On the other hand, if the person buys a load fund who charges a front load (sales commission) of 5%, the amount invested in the fund is only $9,500. If the fund holds a conditional deferred sales commission (CDSC), an expense paid when the fund is sold, and the $500 sales commission comes from the profits of the sale. CDSC declines each year of holding the fund. If you own a level load mutual fund, the 12b-1 fee can be around 1% of the total fund balance. The deduction of these charges is annual as long as the investor holds the fund.
- A no-load fund is a mutual fund in which shares are sold without commission or sales charges.
- No-fee funds are possible because the shares are distributed directly by the investment company, instead of going through a secondary third party.
- A no-load fund is the opposite of a load fund, which charges a commission when buying the fund, when selling it, or as a “level load” for as long as the investor holds the bottom.
Why are there loads?
The rationale for a load fund is that investors compensate a sales intermediary such as a broker, financial planner, investment advisor or other professionals for their time and expertise in selecting an appropriate fund. Some investors find paying these fees inconvenient. However, there is evidence that shows that loaded funds can sometimes outperform no-load funds in some portfolios. Investors should read all fund information carefully and compare similar funds before investing.
Even no-load funds will incur fees that the investor will have to pay. All mutual funds have some form of these fees and expenses, and the difference is how and when these fees are paid. Rather than charging an investor upfront, at the time of purchase, the no-fee earned is part of a fund’s average expense ratios (ER).
The expense ratio measures the operating and administrative expenses of running the mutual fund and is a percentage based on the assets under management (AUM) of the fund. Most of these fees go to pay for the work of the fund manager and advisor. Each investor in the fund will pay their share of these expenses through the reduction of profits distributed on the investments of the mutual fund.
Expense ratios can vary widely from mutual fund to mutual fund, but it’s quite common to find no-load funds with expense ratios up to 5% lower than an equivalent carrier fund. With compound interest and no depreciation of principal, choosing the no-load fund can save an investor thousands of dollars over time.
The largest provider of no-fee mutual funds is The Vanguard Group. Based in Malvern, Pennsylvania, and with more than 30 million investors, the company offers more than 400 mutual funds worldwide for investors to choose from. The do-it-yourself investor who avoids financial advisors and their commission structures can choose from a variety of asset classes, ranging from ultra-conservative money market funds to riskier portfolios such as the Explorer fund. The Explorer fund invests in small to mid capitalization stocks that have averaged an annual return of nearly 12.00% over the past five years, as of August 2022.
T. Rowe Price, founded in 1937, offers one of the oldest no-fee mutual funds in existence. Beginning operations in 1939, the company’s balanced fund charges no initial or final sales charges while maintaining an annual expense ratio of 0.57%, as of August 2022. Receiving an overall four-star rating from the morning star, the fund is suitable for moderate investors who avoid sales charges and seek to grow every dollar invested. The $4.2 billion Balanced Fund has had an average annual return of 5.74% over the past five years, as of August 2022.