The common name for mutual funds that have a sales charge is "load" funds. So a fund without a sales charge is a "no-load" fund. The universe of mutual funds is split about 50-50 between load and no-load funds. Investing in a no-load fund puts more of your cash to work making money. Of course, there will be compromises compared to a load fund.
Fund Share Prices
A mutual fund's share price is called the net asset value. This value is calculated by dividing the fund's portfolio value by the number of shares owned by investors. If you buy shares of a load fund, the share price you pay is the NAV plus the sales load percentage. The load fund purchase price is called the public offering price. So if a fund has a 4 percent sales charge, your account's value will start at about 96 percent of your investment amount. With a no-load fund, you buy shares at the NAV, so your initial account value is 100 percent of the amount you invested.
Investment Adviser Funds
If you go through a broker or investment adviser to invest in mutual funds, the broker will recommend funds with sales charges. The sales charges from load funds are used to compensate advisers for helping investors buy and sell shares. An investment adviser is required to ask questions and understand an investors financial situation and goals before making any investment recommendations. The load in this type of mutual fund is the cost of receiving professional advice.
Going It Alone
No-load mutual funds make sense for those who are willing to research their own investments. No-load fund companies publish free information about their funds, and financial news sources provide fund rankings. Knowledge of the stock and bond markets would help with the selection of a no-load mutual fund.
Investors should be aware of other mutual fund expenses. Every fund charges management and administrative costs. The annual expense ratio of mutual funds ranges from a low of about 0.10 percent a year to more than 2 percent. Over a multi-year investment period, a low-expense fund can make up for paying an upfront load or provide better performance than a similar no-load fund with higher expenses.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.