If you have ever surfed the internet for information on mutual funds, you\'ve undoubtedly come across articles espousing the benefits of no-load mutual funds. These funds allow investors to limit the fees they pay by cutting out the investment advisors and brokers - the middlemen. Most authors writing about the merits of no-load funds base their arguments primarily on fees and sometimes performance, but they rarely delve into the more personal reasons for selecting any investment.

In this article, we\'ll explain the difference between load and no-load mutual funds. We\'ll then explore the reasons investors might prefer a load fund despite its apparent economic disadvantages.

Load Mutual Funds
Load funds are mutual funds you purchase from your advisor or broker that have a sales charge or commission attached. The charge goes to pay the intermediary for his or her time and expertise in selecting the appropriate mutual fund. These funds normally have a front-end, back-end or level sales charge, depending on the particular class of share purchased. For example, A-shares normally have front-end sales charges paid at the time of the initial purchase, while class B-shares have back-end sales charges paid when selling the shares within a specified number of years. (To learn more about mutual fund classes, see The ABCs Of Mutual Funds Classes. )

In addition, a load fund can also have a 12b-1 fee that can be as high as 1% of a fund\'s net asset value (NAV). The Financial Industry Regulatory Authority (FINRA) limits 12b-1 fees used for marketing and distribution expenses to 0.75% and also limits 12b-1 fees used for shareholder services to 0.25%. (For more on mutual fund expense ratios, see Stop Paying High Fees.)

No-Load Mutual Funds
Investors obtain no-load mutual funds at NAV without any of the front-end, back-end or level sales charges. People purchase shares either directly from a mutual fund company or indirectly through a mutual fund supermarket. No-load funds may have a small 12b-1 fee, also known as the cost of distribution, which is incorporated into the fund\'s expense ratio. A shareholder pays for the expense ratio on a daily basis through an automatic reduction in the price of a fund. FINRA allows a mutual fund without any sales charges to have 12b-1 fees up to 0.25% of its average annual assets and still call itself a no-load fund.

There are also plenty of no-load funds available that don\'t charge 12b-1 fees when purchased directly from a mutual fund company. These funds are often referred to as true no-load mutual funds. These differ from the supermarket funds that often have the 12b-1 fee.

Fee-conscious investors seek out mutual funds with lower expenses, which they believe will outperform higher priced mutual funds over time because the fees won\'t eat away at the overall net return.

The No-Load Performance Advantage
Studies generally show that no-load funds will outperform load funds over a given period. For example, study by Craig Israelsen in the May 2003 edition of the Financial Planning Journal, there is a price to pay for the extra services received in a load fund. Israelsen compared the load-adjusted performance of load mutual funds to that of no-load mutual funds. He used Morningstar data that covered the very difficult financial period between 2000 and 2002, in which the S&P 500 fell 35%.

The study showed that no-load mutual funds significantly outperformed load funds during the period. The margin of no-load mutual fund superiority ranged from 10 to 430 basis points, with the most notable superiority occurring in the small cap category. Furthermore, the study showed that no-load mutual funds outperformed load mutual funds in each of the nine Morningstar style categories by an average of about 200 basis points during this turbulent period. This is just simple math: if you pay less for a fund and it performs similarly to a fund with a load, your return will be better. In other words, if you pay for a load fund, it must provide additional value to compensate you for its increased cost. Some load funds do this, but many do not.

It is important to remember that the statistics included above are averages and do not reflect the performance of any individual mutual fund or mutual fund family. (For related reading, check out The Truth Behind Mutual Fund Returns.)

Why would anyone buy a load mutual fund?
On the surface, it seems that all investors would be better off buying no-load mutual funds. After all, who wants to pay a sales charge if you really don\'t have to? However, there are a variety of reasons why a person would be better suited to the load mutual fund group.

  • Many people do not feel comfortable making investment decisions and will not invest without the help of a financial advisor. Financial advisors often persuade people to follow through on investment programs that are in their best interests.
  • Thoughtful investment decisions require research, and many people lack the time needed to do their own research. Finding the time to manage investments can be extremely challenging.
  • Some investors have an existing relationship with a broker or a financial advisor and do not want to damage the relationship by pursuing investments on their own. They may also prefer the "one-stop shopping" that a financial advisor can provide.
  • Many people want someone to blame when a problem occurs with one of their investments.
  • Finally, some investment professionals argue that brokers and financial advisors have the ability to keep their clients from making rash decisions during turbulent market periods. The argument is that no-load mutual fund investors are far more likely to sell their investments at exactly the wrong time. (For more insight, check out When To Sell A Mutual Fund.)

Conclusion
Despite the fees and, by extension, the inferior returns, load funds can still be a good investment for inexperienced or very busy investors. Ultimately, it will be for you to decide whether the services you receive are valuable enough to justify giving up the higher returns of a no-load mutual fund.

Before you begin shopping, check out Picking The Right Mutual Fund.

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Financial Sector Mutual Funds

    Discover which mutual funds in the financial industry are top-rated funds, and learn how investors can utilize these funds in a diversified portfolio.
  2. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  3. Mutual Funds & ETFs

    Top 5 Real Estate Mutual Funds (CGMRX, FREDX)

    Discover the top rated mutual funds focused on the real estate sector, and understand which investors are best suited to hold real estate funds.
  4. Professionals

    Career Advice: Financial Planner Vs. Stockbroker

    Read an in-depth review of a career as a financial planner as opposed to a career as a stockbroker, including how to decide which is best for you.
  5. Mutual Funds & ETFs

    2 No-Load Mutual Funds Suitable for Retirement (VIPSX; FTBFX;)

    Take a closer look at two no-load mutual funds that should be on the radar for retirees or potential retirees looking for security and inflation protection.
  6. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  7. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  8. Mutual Funds & ETFs

    The 3 Best Downside Protection Equity Mutual Funds

    Learn how it is possible to profit in a bear market by owning the correct selection of mutual funds that provide downside protection and opportunity.
  9. Mutual Funds & ETFs

    The 4 Best Lord Abbett Mutual Funds

    Discover the four best mutual funds administered and managed by Lord, Abbett & Co., LLC that offer investors a wide variety of investment strategies.
  10. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
RELATED FAQS
  1. How do no-load funds typically perform relative to load funds?

    No-load mutual funds are pooled investments that do not carry an upfront sales charge when purchased or a deferred sales ... Read Full Answer >>
  2. What is the difference between a no-load mutual fund and a fund that has no front ...

    Mutual fund companies provide investors a number of methods to acquire shares, including paying a front-end sales load, investing ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. Do mutual funds require a demat account?

    A dematerialized account enables electronic transfer of funds. The account is used so an investor does not need to hold the ... Read Full Answer >>
  5. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  6. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center