How does a no-load fund make money?

A no-load mutual fund does not have a sales charge, called a "load" in investment jargon, but that does not mean it has no fees. All mutual funds have built-in costs that go toward the salaries of the fund's investment advisers. These so-called "carry fees" have the practical effect of reducing the investor's net returns.

Not all carry fees are the same. Some no-load mutual funds have management fees less than 0.5%, while others can be 2.5% or higher. Investors who use a fee-based financial adviser to purchase no-load funds may also see a fee based on total assets invested.

How Mutual Funds Make Money

Mutual funds do not rely on loads, or sales charges, for financing. Loads are paid out to financial intermediaries, such as investment advisers or brokers, to compensate them for their services. Mutual fund providers are largely indifferent to the kind of loads, if any, that are assessed on their products.

Each mutual fund is managed by a professional investment manager and his team. It is the job of the investment manager to buy and sell securities in accordance with the stated objectives of the fund. The fund manager receives a small fee based on the fund's growth. In other words, he makes money when the fund makes money.

One easy way for a fund manager to survive on less fees is to reduce the turnover in the fund portfolio. Investment managers still have to pay fees when they buy and sell shares or bonds in the secondary market. As those fees rise, so too do the carry fees that come with the fund. Depending on the type of fund and how investors purchase it, there may be other expenses assessed that do not depend on the performance of the fund.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.