What Is a No-Load Fund?
A no-load fund is a mutualfundin which shares are sold without a commission orsales charge. This absence of fees occurs because the shares are distributed directly by theinvestment company, instead of going through a secondary party. This absence of a sales charges is the opposite of a load fund—either front-load or back-load—which charges a commission at the time of the fund's purchase or sale. Also, some mutual funds are level-load funds where fees continue for as long as the investor holds the fund.
Understanding a No-Load Fund
Because there is no transaction cost to purchase a no-load fund, all of the money invested is working for the investor. For example, if an investor purchases $10,000 worth of a no-load mutual fund, all $10,000 will be invested into the fund.
On the other hand, if the person buys aload fundthat charges afront-end load (sales commission) of 5%, the amount invested in the fund is only $9,500. If the fund holds a contingent deferred sales charge (CDSC), an expense-paid at the time of selling the fund, and the $500 sales commission comes out of the profits of the sale. The CDSC decline each year the fund is held. Should you hold a level-load mutual fund, the 12b-1 fees may be around 1% of the fund's total balance. The deduction of this charge is annual for as long as the investor owns the fund.
- A no-load fund is a mutualfundin which shares are sold without a commission orsales charge.
- No-load funds are possible because the shares are distributed directly by theinvestment company, instead of going through a secondary party.
- A no-load fund is the opposite of a load fund, which charges a commission at the time of the fund's purchase, at the time of its sale, or as a "level-load" for as long as the investor holds the fund.
Why Are There Loads?
The justification for a load fund is that investors are compensating a sales intermediary such as a broker,financial planner,investment advisoror other professionals for their time and expertise in selecting an appropriate fund. Some investors find the paying of these fees bothersome. However, there is evidence that shows load funds can at times outperformno-load funds in some portfolios. Investors should carefully read all fund information and compare similar funds before investing.
Even no-load funds will carry fees that the investor must pay. All mutual funds carry one form or another of such fees and expenses, and the difference comes in how and when these charges are paid. Rather than charging an investor upfront, at the time of purchase, no-load fees earned are part of a fund’s average expense ratios (ER).
The expense ratio measures the operating and administrative charges for operating the mutual fund, and are a percentage based on the fund's assets under management (AUM). The largest portion of this fee is to pay for the work of the fund manager and advisor. Every investor in the fund will pay their share of these expenses through the reduction of profits distributed on the mutual fund's investments.
Expense ratios can vary widely among different mutual funds, but it is fairly routine to find no-load funds with expense ratios that are as much as 5% less than an equivalent load-bearing fund. With compound interest and no principal depreciation, choosing the no-load fund can save an investor thousands of dollars over time.
Real-World Examples
The largest purveyor of no-load mutual funds is The Vanguard Group. Located in Malvern, Pennsylvania, and boasting more than 30 million investors, the company offers over 400 mutual funds worldwide from which investors can choose. The do-it-yourself investor who eschews financial advisors and their commission structures can select 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-cap stocks that have annually averaged nearly a 12.00% return over the last five years, as of August 2022.
T. Rowe Price, founded in 1937, offers one of the oldest no-load mutual funds in existence. Beginning operations in 1939, the company’s Balanced Fund charges no up-front or back-end sales charges while maintaining an annual expense ratio of 0.57%, as of August 2022. Receiving an overall four-star rating from Morningstar, the fund appeals to moderate investors who avoid sales loads and seek to put every dollar invested to work. The $4.2 billion Balanced Fund has averaged an annual return of 5.74% over the last five years, as of August 2022.
FAQs
No-load funds offer a cost-effective option by selling shares without commissions or sales charges. This approach reduces expenses and allows you to invest more in the fund. Once relatively rare among mutual funds, no-load funds now cover over 90% of those offered. U.S. Securities Exchange Commission.
What is an example of a no-load fund? ›
Example: Vanguard's no-load funds
One of Vanguard's flagship no-load funds is the Vanguard 500 Index Fund (VFINX 1.02%). This fund is designed to track the performance of the S&P 500 (SNPINDEX:^GSPC) market index, which consists of the 500 largest U.S. companies measured by market capitalization.
What are the benefits of no-load mutual funds? ›
The No-Load Performance Advantage
The first, and most obvious, is that they come with no (or low) fees. This means that more of your capital is invested rather than going into the pocket of an adviser or mutual fund company.
What is the primary advantage of a no-load mutual fund? ›
A no-load mutual fund means there will not be a sales charge when the investor buys the shares or when they sell their shares. However, this does not mean that absolutely no fee will be charged.
Which of the following is a benefit of investing in a no-load mutual fund? ›
A no load fund is a special kind of savings fund where you do not have to pay any extra fees when you buy or sell shares. Instead, you just pay a small yearly fee for managing the fund. Investors like these funds because they do not have to give extra money to brokers or financial advisors when they invest.
How do no-load funds make money? ›
How do no-load funds make their money? No-load funds make money through management fees and other expenses associated with running the fund. However, their annual expense ratio can be much lower than that of a load mutual fund because no sales charge is collected.
What is an advantage of a load fund? ›
The reason why most investors go for load funds, as opposed to no-load funds, is to compensate the financial intermediary who did the research, recommended, and sold the fund to them.
What is the disadvantage of no-load funds? ›
The main disadvantage of buying a no-load fund is the lack of investment advice or direction, as they don't charge a sales commission. This can be a drawback for investors needing guidance or preferring to work with a financial advisor.
What is a disadvantage of buying a no-load fund? ›
No-load funds generally don't provide investors with investment advice or direction because they don't charge a sales commission. Investors who prefer to work with a financial advisor or who might require assistance with their investment choices may find this to be a disadvantage.
Do no-load funds have fees? ›
No-load funds require investors to pay sales commissions. With no special fee going to a broker or advisor, no-load funds are typically cheaper investments that can result in higher returns. However, no-load funds do charge fees.
A true no-load fund is defined as any fund with the following characteristics: Front Load equal to zero. Deferred Load equal to zero. 12b-1 Fee less than or equal to 0.25.
What is the disadvantage of buying a load fund? ›
Ongoing fees, such as level load fees, can also erode returns over time. Investors must consider the impact of load fees on their investment returns and weigh them against the potential benefits, such as access to professional advice and lower ongoing management fees.
Are no-load funds passively managed? ›
“If you're buying from a company, you might be a do-it-yourself investor and the fund company receives compensation because you've bought the fund, or you have money in other accounts, so they don't charge sales fees.” Bednar points out that many no-load funds are index funds and passively managed.
What does "no-load fund" mean? ›
A fund that does not charge any type of sales load. But not every type of shareholder fee is a "sales load," and a no-load fund may charge fees that are not sales loads. No-load funds also charge operating expenses.
What is one benefit of investing in a no-load fund over a load mutual fund quizlet? ›
A load fund is a mutual fund in which investors pay a commission, for each purchase transaction, that may be as high as ____ percent of the purchase price for investments. One benefit of investing in a no-load fund over a load mutual fund is: with a no-load fund, 100 percent of your investment is used to buy shares.
Do no-load funds have 12B-1 fees? ›
A mutual fund that distributes its own shares and markets itself as a no-load fund may charge a 12B-1 fee that is no more than . 25 percent.
What type of funds are typically no-load funds? ›
A no-load fund is a mutual fund that doesn't charge commission or sales charge. No-load funds are possible because the shares are distributed directly by the investment company, instead of going through a secondary party.
How do you know if a fund is no-load? ›
While the Financial Industry Regulation Authority (FINRA) allows funds to charge up to 1% for 12b-1 fees, mutual funds can consider themselves no-load funds if their 12b-1 fees don't exceed 0.25% of the average annual value of their assets.
What does no-load fund mean? ›
A fund that does not charge any type of sales load. But not every type of shareholder fee is a "sales load," and a no-load fund may charge fees that are not sales loads. No-load funds also charge operating expenses.
