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.)

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

    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

    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. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  7. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  8. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  9. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  10. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  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. 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 >>
  4. 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 >>
  5. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center