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Mutual fund managerMutual funds can be a useful tool for increasing diversification in your portfolio but it’s important to understand what you might pay to buy and sell them. Some mutual funds carry loads or sales charges, while others don’t. A no-load mutual fund allows you to sidestep sales charges but there are other costs you may pay to own them. Understanding the differences between load and no-load mutual funds can help you decide where to invest your money.

If you’re new to fund investing, a financial advisor can provide helpful assistance on which types are most appropriate for your portfolio.

Mutual Fund Loads, Explained

A mutual fund load is a fee that’s paid to an investment firm or broker that offers the fund at the time it’s bought or sold. Effectively, this fee is a commission that the broker gets to collect from investors. Mutual fund loads can be applied on the front-end when shares are purchased or the back-end when shares are sold.

Whether you pay a front-end load or a back-end load typically hinges on the share class of the fund in question. Front-end loads are more often associated with Class A mutual fund shares. So the fee comes right off the top of your investment. With Class B shares, you’re paying back-end loads so the money is paid out of your initial investment plus the earnings when you sell. Class C shares may charge a level load or annual fee.

It’s important to know that mutual fund sales loads are separate from other charges, such as 12b-1 fees. This is an annual marketing fee that’s most often rolled into the fund’s expense ratio. An expense ratio reflects the annual cost of owning a mutual fund, expressed as a percentage of fund assets.

What Is a No-Load Mutual Fund?

Mutual fund notebook

A no-load mutual fund is just what it sounds like: a mutual fund that doesn’t charge any load fees. Shares of the fund can be bought and sold without having to pay any type of sales charge or commission to the broker. This means that there are no-load fees detracting from your initial investment in the fund or in the profits you realize when selling the fund. No-load mutual funds typically aren’t associated with a specific share class. Instead, they may be referred to as investor shares or retail shares to distinguish them from load mutual funds.

So if you’re comparing mutual fund options, that can be an easy giveaway that a fund is no-load.

No-Load Mutual Fund Costs

Again, no-load mutual funds are not fee-free. You still have to pay the fund’s expense ratio each year that you own it. Mutual fund expense ratios can include a variety of fees, including the aforementioned 12b-1 fees, as well as:

  • Administrative fees
  • Management fees
  • Marketing costs
  • Recordkeeping fees
  • Other operational costs

Generally, the lower the expense ratio is for a particular mutual fund, the better for you. A higher expense ratio means that you’re handing back more of your investment earnings to own the fund each year. A higher expense ratio may be justifiable if a mutual fund significantly outperforms similar funds but if you’re a fee-conscious investor, you may prefer lower-cost options.

In terms of what is a good expense ratio for a no-load mutual fund, it really depends on the fund itself, its strategy and what you hope to gain by investing in it. With passive mutual funds, for example, the objective is typically to mimic the performance of a specific market benchmark, such as the S&P 500. The upside of passively managed funds is that they tend to have lower expense ratios.

Actively managed funds, on the other hand, aim to beat the market rather than meet a benchmark’s performance. As a result, they can potentially deliver better returns than passive funds but the trade-off usually means paying a higher expense ratio.

Are No-Load Mutual Funds a Good Investment?

Whether it makes sense to invest in no-load mutual funds can depend on several things, including your:

  • Risk tolerance
  • Investment goals and objectives
  • Timeline for investing
  • Overall investing strategy or style

No-load mutual funds could be a good fit if you’re interested in keeping your investment costs low. While no-load funds do still have expense ratios you’ll need to cover, you’re not paying anything extra in the form of sales charges to own them. If you’re interested in holding one or more mutual funds as part of a long-term investment strategy, minimizing fees can help preserve a larger share of your earnings.

In terms of performance, no-load mutual funds have the potential to outperform load mutual funds. Whether they do so can depend on the fund’s makeup and the investments it holds, as well as the fund manager’s strategy and market conditions. Depending on the market environment, passive no-load funds may fare better than actively managed load funds.

How to Invest in No-Load Funds

Mutual fund listings in a newspaperThere are two basic ways to approach investing in no-load funds. First, you can purchase them with the help of a financial advisor. A financial advisor can review your financial situation, risk tolerance and timeline for investing to help you decide which no-load mutual fund or funds is right for you. Financial advisors that are fee-only get paid for the services you provide, not through commissions for mutual funds or other products they recommend.

The other option is to purchase no-load mutual funds through an online brokerage account. The advantage here is that you won’t pay any fees to a financial advisor. You may, however, pay a commission fee to the brokerage to buy or sell mutual fund shares.

When deciding which route to take, consider how helpful it may be to have professional advice and guidance when choosing no-load funds. If you’re newer to investing, having a financial advisor’s expertise can be reassuring as you build your investment portfolio.

The Bottom Line

A no-load mutual fund is one way to achieve your investment goals while also keeping your costs low. When comparing individual no-load funds, take time to read through the fund’s prospectus. This can help you better understand the fund’s expense ratio, its investment strategy and how it has performed historically.

Tips for Investing

  • If you’d like a good estimate of how your investments are faring and how well you’re advancing toward your goal, a free, easy-to-use investment calculator can give you a quick read on the matter.
  • Consider talking to a financial advisor about how to effectively manage costs in your portfolio, whether that means investing in no-load mutual funds or something else. If you don’t have a financial advisor yet, finding one to work with doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area quickly. If you’re ready, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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