Load vs. No-load Mutual Fund: What's the Difference?

Mutual funds are often categorized by how the fees are charged to the customer. A mutual fund is made up of a pool of securities managed by an investment management firm. Mutual funds can give everyday investors access to diversification, strategies, and professional management that they would not normally be able to get without the scale achieved by pooling money together. The firm offering the fund uses a pooled fund investment approach to invest in securities that match the investing strategy of the fund, as laid out in its prospectus.

Like most things in life, there are fees and commissions involved with mutual funds. Some mutual funds will have a sales charge called a load. Conversely, other funds market themselves as no-load funds, meaning they do not charge a sales charge.

Loads are only one of the fees that must be considered when investing in a mutual fund. A fee can be a necessary evil, after all that professional management needs to be paid, but they may also become a source of negative return.

Also, the fees charged on mutual funds can be controversial when it comes to where those fees are going: paying investment managers, marketers, or commissions to brokers. 

A load mutual fund charges you a sales charge or commission for the shares purchased. This charge could be a percentage of the amount you are investing, or it can be a flat fee, depending on the mutual fund provider.

For example, if you invested $1,000 into a 5% load mutual fund, you would actually be investing only $950, with the remaining $50 going to the company as a commission. The fee goes to compensate a sales intermediary, such as a broker, financial planner or investment advisor, for his time and expertise in selecting an appropriate fund for the investor. There are different types of load an investor may encounter.

• Front-end loads, also called Class A shares, is a single charge paid by the investor when they purchase shares of the fund.
• Back-end load, or Class B shares, charge a one-time fee paid when you redeem or sell, your mutual fund shares.
• Level load funds, also known as Class C shares, are yearly charges and will be a fixed percentage taken from the fund's assets.

Loads are only one of the fees which may impact the investor of a mutual fund. Some loads will be paid from the assets of the mutual fund and will reduce the returns that will be distributed to the investor.

A no-load mutual fund means there will not be a sales charge when the investor buys the shares or when they sell their shares. However, this does not mean that absolutely no fee will be charged.

A fund may market themselves as a no-load fund if they charge less than the Financial Industry Regulatory Authority (FINRA) allowed 12-1b charges. While these funds do not charge a front or back load sales fee, they may make it up by charging other fees. The best way to determine the charges is by reading the fund's prospectus.

The management firm will pay any charges based on the fund's daily net asset value (NAV) from the no-load mutual fund's assets This method of payment impacts the investor when they receive a smaller distribution.

Also, there may be limitations on the redemption of no-load shares. Shares in a no-load fund can be sold or redeemed only after a specific period. Those sold early will incur a fee—but if you are a long-term investor, there is no need to worry. 

No-load funds are often sold through an investment company, rather than through a third-party sales firm. However, some companies, such as banks or broker-dealers, may charge their own fees for handling the transactions of third-party mutual funds.

Most people recommend trying to avoid load funds altogether. Many studies have shown both types of mutual funds offer the same return, but load funds charge you a commission fee. While the commission may seem like a small, one-time fee, the loss of compounded returns over the years can be substantial.

• Load funds are mutual funds that charge a sales fee or commission.
• No-load funds usually do not charge any sales fee or commission, as long as you keep your money invested for a specified period, often five years.
• Sales fees reduce the money invested, which, once compounded interest is taken into account, can be significant.