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No-Load Mutual Fund

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A No-Load Mutual Fund?

A no-load mutual fund or a no-load fund refers to a mutual fund that does not carry a sales charge or commission, i.e., is free of exit load. The prime reason is the absence of intermediaries or brokers when an investor directly purchases from the investment company. No-load fees are generated and included in a fund’s average expense ratios (ER) rather than being charged to an investor upfront at the time of purchase.

What are No-Load Mutual Funds?

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However, no-load funds do not mean the fund is free of charge. Instead, they either charge significantly less than other funds or collect other fees rather than the customary charges. Nevertheless, the best no-load mutual funds can help investors save thousands of dollars in the long run.

Key Takeaways

  • No-load mutual funds do not charge a commission or any fee for services provided. In theory, they are supposed to be free of charge.
  • Because the investing company distributes the shares directly rather than through a third party, there are no costs involved.
  • However, in practice, all investment companies and brokerage firms charge an operational fee for their services.
  • No-load funds can most aptly be described as those that collect lesser fees or other fees than what most load funds usually collect.

No-Load Mutual Fund Explained

No-load mutual funds are one of those many investments that have become popular due to the need for decreased investment costs for investors. Mutual fund loads have always been a matter of great concern among investors. Funds weigh a load on almost everything, thus leading to an increased cost. And the net amount invested will consequently fall. Lesser the less investment, the lesser the profits.

Enter no-load funds that only collect a fee from the profits. Thus, charging a 5% fee on the investment amount and investing the balance is not the same as charging 5% on profits. Therefore, the latter is more profitable and enhances the customers’ savings. This is the main logic behind no-load funds and is gaining prominence among customers.

However, not all shareholder payments fall under “sales loads,” and no-load funds may levy costs that are not sales loads. No-load funds also charge operating costs. The fund manager is paid a nominal fee based on the fund’s growth. So, they benefit financially from the fund’s success.

Another type of fund is the level-load fund, which keeps charging investors as long as they invest the amount into the fund. This saves more than the load funds. Thus, investors must first research and thoroughly understand their options before investing their funds. This can help them save more and benefit more.

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Fees

Here is the fee structure of no-load funds. But before that, let’s understand how load mutual funds are charged.

Load mutual funds are subject to the 12B-1 fee. As established by the Securities and Exchange Commission (SEC), this charge allows funds to collect fees for operating and administrative expenses. The funds also have to pay the brokers who bring in new customers. Load funds charge back-end, front-end, and purchase and selling fees.

However, investment companies can only collect this fee if they have adopted a 12B-1 plan. According to the rule, funds can collect a minimum of 0.25% to a maximum of 1% of the fund’s net assets as fees directly from the funds before investing.

On the contrary, the no-load mutual fund 12B-1 fee does not apply to funds. Firstly, no-load funds do not charge the customs fees collected by load funds. Instead, they collect management and shareholder service fees, not back-end, front-end, purchasing, selling, etc. Secondly, even the fees they collect are lesser than what most other load funds collect. Finally, no-load funds collect fees from the profits before distribution. In contrast, the fees are first deducted from the customer’s investment amount, and the balance is invested in load funds.

How To Buy No-Load Mutual Funds?

Like every other security, investors can purchase no-load funds directly from the investment company. This would be the best option to reduce the load to the maximum. Alternatively, investors can also buy from brokerage firms that offer funds at a lesser load. It is always recommended to research and understand the terms of such investments before putting money into them.

Some of the best no-load mutual funds in the U.S. include:

  • Vanguard Emerging Markets Bond Fund
  • Fidelity Blue Chip Growth Fund
  • Fidelity Small Cap Value Fund
  • T. Rowe Price Growth Stock Fund

No Load Mutual Funds vs Load Mutual Funds

Most mutual funds are load funds. Let’s see how they differ from no-load funds.

  • Load mutual funds charge various fees – front-end, back-end, buying, selling, etc. The funds charge the investors according to the 12-B1 fee by the SEC.
  • Load mutual funds mostly involve third parties, such as brokers and intermediaries acting between the investor and the investment company. Usually, these intermediaries charge a commission for their service. No-load mutual funds do not involve these third parties.
  • The main difference between these two mutual funds is not the amount they charge but the methods.
  • Firstly, in no-load mutual funds, the fees are usually lesser than what other-load mutual funds charge.
  • Secondly, load mutual funds collect the fees from the investment amount. Thus, they invest only the balance amount into the funds. On the other hand, no-load funds collect the fees from the profit.
  • Example: Jack pays $5000 towards his load mutual fund. They charge 5% fees and collect $250. The rest of the $4750 goes into the fund. On the other hand, Jill pays $5000 on her no-load fund. Out of the profit of $1000 she received, a 3% fee is charged. The balance of $970 is paid to her.
  • Therefore, a no-load fund can be a great way of saving a few additional dollars in the long run.

Frequently Asked Questions (FAQs)

1. Do no-load mutual funds have management fees?

Yes. All funds collect a fee in some form or the other. However, the no-load mutual fund 12B-1 fee doesn’t apply here, as the fee they collect is much lesser than the maximum limit mandated by the SEC.

2. How do no-load mutual funds make money?

No-load funds make money the same way every mutual fund does. They pool investments and invest into another security over longer periods. The profits are then divided proportionately between investors. These funds collect the fee from the profits before distribution, thus minimizing investors’ costs.

3. Are no-load mutual funds good?

Yes. But there is no comparison regarding the returns of no-load and load mutual funds. Nevertheless, no-load funds are a great way to save additional costs of investments.

This article has been a guide to what is No-Load Mutual Fund. We explain the topic in detail, including how to buy it, its fees, & comparison with load mutual funds. You may also find some useful articles here –

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