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 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
According to a 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.

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.

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.)