What's the difference between a load and no-load mutual fund?
Great question. Essentially any fund with a "Load" is one in which you will need to pay a sales charge to get in (A shares) or get out of (B shares in the first 7-8 years, or C shares within the first year.)
Different fund families have different loads for their funds and will sometimes give discounts to investors (or households) that invest over certain thresholds. All of this information can be found in the fund prospectus which should be reviewed before buying the fund.
A "No-Load" fund is one in which there is no load (or sales charge) to buy into or sell out of that fund.
Always do some research on the fund before making a purchase.
A loaded mutual fund typically charges a front-end or a rear-end load or cost. The load is a percentage (typically 1% to 5%) cost of the amount invested. If a mutual fund charges a front-end load, you will pay to enter the fund. i.e. If you buy $10,000 of a front-end loaded fund with a 5% front-end load, you will pay $500 to enter the fund. So you will pay $10,500 to buy $10,000 of that fund. If a mutual fund charges a back-end load, you will pay to exit the fund. If you sell $10,000 of a back-end loaded fund with a 3% back-end load, you will pay $300 to exit the fund. So you will get $9,700 if you sell $10,000 of that fund.
When loads apply, you will usually see different classes of the same fund. A-class shares are usually the front-end loaded type. B-class shares are usually the back-end loaded type. Usually back-end loaded shares (B-class) have a declining schedule where you might pay 5% to exit in year one, 4% to exit in year 2, 3% to exit in year 3, 2% to exit in year 4, and 1% to exit in year 5. Once the surrender schedule is completed (usually in 5 years) the shares will convert automatically to the A-class that has no back-end load. You will usually find that B-class shares have a higher internal expense ratio than the A-class. It will thus cost you more annually while you hold the B-Class shares than holding the A-class shares. Many studies have concluded that A-class shares may work out better from a cost standpoint over a 5 year holding period.
No-load funds do not play this game. There is neither a front-end nor a back-end load.
I find loaded funds to be too expensive and I rarely recommend them unless they have outstanding performance vs their peers and the load is waived. If you research mutual funds, you can usually find a comparable no-load mutual fund with an equivalent objective to the loaded mutual fund you are considering.
A "load" refers to a sales fee charged by Mutual Fund companies, usually related to commissions paid to brokers. Many mutual funds have a front-end load or back-end load, essentially indicating if the sales fee is paid up front or at the time you redeem your shares.
A “no load” fund refers to mutual funds in which there is no additional sales fee charged by the mutual fund company. In many cases, the share class of the mutual fund can indicate if, and what type of load may apply to a certain mutual fund.
Keep in mind, all mutual funds have an annual fund expense. This is referred to as the expense ratio of the fund. Regardless if you purchase a load or no load fund, you will still pay this expense ratio. There are many different share classes for mutual funds, different share classes have different fund expenses. The most common retail share classes (A, B, C) are amongst the most expensive. Institutional share classes (I, R, Y) have no loads and lower annual expenses.
Please be careful here, the real answer is that there is no such thing as a no load fund!
All money managers get paid to manage a fund, so the term is misleading. What the industry means is that some funds have some type of charge or fee that is stated in their offering documents so you can see the number. This is a load fund. There are different types, some charge up fund, but most are a % of the assets managed.
Some funds say they are "no load" because there is no stated fee. However, a fee is charged internally and subtracted from your return. You are paying.
Many people come to me saying " I'm not paying any fee in my no load fund", they have been mislead. Look in the fund info and you will see what you really are paying.
A load is a commission charged on the purchase and in some cases the sale of a mutual fund. There are different types of mutual funds with loads including ones that charge a sales load or commission upon purchase as well as funds that charge loads if sold within a specific number of years after purchase. Funds that charge a load upon purchase are known as front loaded and funds that charge a load upon sale are known as back end loaded. One tip off is that a mutual fund is a loaded fund if there is the word "Class" in the fund's description such as Class A or Class B shares.
Before buying a loaded mutual fund, you may get better results with lower cost by asking the broker if the load can be waived. In addition, finding a similar mutual fund in terms of risk, strategy and objectives with lower internal fees and no sales loads may be more beneficial long-term. Funds without loads are known as no load mutual funds.
Another site to visit is the National Association of Personal Financial Advisors (NAPFA.org) regarding the question on loads and other related cost. NAPFA's site has helpful information on how advisors charge for their services as well as a directory of advisors who are fee-only and therefore do not sell loaded mutual funds for commissions.