If you pay anything more than passing attention to financial media, you’ve probably heard of no-load mutual funds. For a variety of reasons, they’re increasingly popular with DIY retail investors and wealth managers alike. You probably don’t know everything there is to know about no-load mutual funds, however. You might not know, for instance, how they differ from load funds; you might even be fuzzy on the meaning of “load” in this context.
“More than almost any other definitional question about investing and money management, my clients ask me about the difference between load and no-load mutual funds,” says San Francisco-based wealth manager Daniella Rand. For years, money managers have fielded this question, along with more specific queries about the overall suitability of various types of mutual funds. (And there are plenty.)
For our purposes, we’ll focus on the distinction between load and no-load funds, and the different ways in which funds may calculate load fees.
What Is A Mutual Fund Load?
In the context of mutual funds, a “load” is essentially a sales charge. In effect, a load is a commission payable to the fund manager or investment banker, usually at a point of sale.
Depending on when it’s assessed, the load may reduce the fund’s principal, its sale proceeds, or debit from its value at regular intervals. It’s calculated as a percentage; for instance, a 5% front-end load (more on that in a moment) reduces the fund’s principal by $500. In all cases, the load reduces the total value available to the fund holder, just like other fund expenses.
Types Of Mutual Fund Loads
Mutual fund loads take a number of forms:
- Front-end loads are assessed at the point of purchase, with the load amount debited from the fund principal before the instrument transfers to the buyer
- Back-end loads are assessed at the point of sale, with the load amount debited from the total sale proceeds before they’re made available to the seller
- Constant or level loads, which are typically assessed annually as a fixed percentage and may cover marketing and distribution costs for the fund
What “No Load” Really Means
No load mutual funds don’t charge front-end or back-end loads. However, this doesn’t mean that they don’t carry real costs while offering high interest investments. Indeed, all mutual funds have expense ratios, which always include management fees (fund managers’ salaries) and sometimes include 12b-1 fees (level loads). Funds that don’t charge 12b-1 fees can truly claim to be “no load,” but they still must compensate their managers at a rate commensurate with the effort required for the task.
Are No-Load Funds Right For You?
The short answer: Ask your financial advisor, and if you’re not sure you like what you hear, consider looking elsewhere for financial advice. (Not sure where to start? Check out this guide to finding a financial advisor.)
Like so many other money-related matters, the difference between load and no-load mutual funds can be confounding for non-professionals. Nevertheless, it’s crucial that investors of every stripe understand how these products differ from one another.
Even more importantly, it’s crucial that every investor work with a financial advisor in which he or she has unshakable confidence and trust. After all, this is a relationship that you have every right to expect to endure for years to come. That’s simply not a circumstance under which you want to settle.