Among other distinguishing features, mutual funds are acquired with a sales charge (load) or without a sales charge (no load). If there is a load, the charge can be as high as 8%, although it seems that a 3 to 5.75% range is most common. This charge is paid by the investor (the buyer of the fund) to the seller (a financial intermediary such as a brokerage firm, insurance company, financial planner or investment advisor) for services rendered. The charge is deducted from the amount being invested.
No-load mutual funds are offered directly to the investing public by fund companies, or they are sold to investors by financial intermediaries who have a compensation arrangement (hourly, flat fee or a percentage of assets) with the purchaser. In this case, a sales charge is not involved and the investor fully invests his or her available money into funds sponsored by a no-load fund company.
There are five general aspects of the load/no-load debate worth considering:
1. Fund investors need to understand that a load is a selling commission paid to a financial intermediary and not the fund company. It does not buy increased investment expertise by fund management. On the other hand, financial intermediaries defend their fees as fair compensation for the investment advisory services they provide to the investor.
2. The load-fund business has complicated things for investors by confusing them with a variety of fund share classes: A, B and C. In brief, these simply represent three different ways of applying a sales charge. With A shares you pay up front and with B shares you pay at the back end. With C shares, called "level-load," the year-to-year costs are usually high, but spread out over time.
3. A fund's load is not included in the computation of a mutual fund's expense ratio (see below) and, therefore, is an additional cost to be considered when investing in load funds.
4. The long historical record on mutual funds shows that there is little difference in the total return performance of load and no-load funds.
5. Employee participants in a defined-contribution, company sponsored retirement plan, such as a 401(k), generally need not be concerned about loads. In most instances, these retirement plans waive any sales charges on their fund investment options.
TradingHow much a fund charges for its services is the most important indicator of how well it will perform.
InvestingThese funds let you cut out the middleman - and the fees.
InvestingLearn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
Financial AdvisorRead 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.
InvestingA no-load fund is a type of mutual fund that does not charge a front-end, back-end or level sales charge.
InvestingLearn about the hidden costs that can be triggered when you redeem mutual fund shares. Even no-load funds have fees and expenses you may not know about.
InvestingLearn how to evaluate mutual funds and find the right one for you.
Financial AdvisorA front-end load is a commission or sales charge paid by the investor at the initial purchase of an investment.
InvestingConfused about the full range of fees on ETF and mutual funds? Here's a quick guide on fees and expenses.