Mutual Fund Load vs. No Load

by Craig Woodman

    Mutual funds come in two major types, load and no-load funds. A load fund charges a percentage of the investment, usually when you purchase shares, and pays this percentage to a broker who sold the fund. A no-load fund does not charge this fee. While you invest less principal because of the load in a loaded fund, no-load funds are not automatically a better deal.

    If you use a financial professional to help you invest, his advice will come at a cost. Some advisers charge by the hour, while others are paid based on a commission, as with a loaded fund. If you pay an adviser for two hours of services at $100 per hour to invest $5,000 in a no load fund, it is the same as paying a 4 percent load on the same investment, with the broker being paid the commission. If you do not need professional advice, a no-load fund may have the advantage.

    You may choose to invest in mutual funds of certain sectors such as healthcare or technology. A fund you wish to invest in may only be available with a load. If you need this fund to complete your portfolio, it may be worth paying the sales load, particularly if you cannot find a no-load equivalent.

    Mutual funds incur expenses from the salaries they pay their managers and staff, as well as expenses related to trading securities in a fund. Investors must carefully review the expense profile of the funds they are considering, as funds with higher expense ratios can reduce investment returns. A loaded fund with a lower expense ratio may be a better overall investment than a no-load fund with higher expenses.

    Mutual funds are allowed to collect a fee for marketing and selling their fund to new investors, called a 12b-1 fees. According to Securities and Exchange Commission rules, a no-load fund can charge up to 0.25 percent of your balance in 12b-1 fees and a loaded fund can charge up to 1 percent.

    A purchase fee is similar to a load, since you pay it at the time you buy a mutual fund. However, a load is paid to a broker as a commission for selling the fund, and a purchase fee is paid to the mutual fund itself to defray the expenses related to your purchase of shares.

    About the Author

    Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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