No-Load Funds vs Load Funds

Determine which type of fund works best for your situation

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Believe it or not, good arguments exist on both sides of the no-load funds vs load funds debate. One or the other type may be best for you, but before you build a portfolio of mutual funds it helps to learn the basics of loads and other mutual fund fees, and understand the purposes and differences between the various share classes of mutual funds. Then you can more easily determine which type works best for you.

What Is a Mutual Fund Load?

A mutual fund load is a fee charged for the purchase or sale of a mutual fund. Loads charged on purchases of fund shares are called front-end loads, and loads charged upon the sale of mutual fund shares are called back-end loads or a contingent deferred sales charge (CDSC). Funds that charge loads are generally referred to as "load funds" and funds that do not charge loads are called "no-load funds."

Do It Yourself or Use an Advisor?

The no-load vs. load fund debate has to do, in part, with whether you want to invest yourself or use an advisor. Since the load goes to pay for advice and/or service in making mutual fund transactions, decide if you want to do all of the research and trading yourself or if you want an advisor or broker to do it for you.

Most investment advisors and brokers are just as susceptible as the average do-it-yourself investor to the emotions and poor judgment that can cause lower returns in the long run. However, a good advisor will look at your money logically and help lay out an objective investing roadmap so you can reach your future financial goals while living your present life more fully. How much might this be worth to you?

Reasons to Buy a Load Fund

Why buy a load fund? You may think that no-load funds always make the most sense for investors. The reason for buying loaded funds is to pay the advisor or broker who did the fund research, made the recommendation, sold you the fund, and then placed the trade for the purchase. However, no good reason exists to pay anyone unless you exchange something of value, other than the mutual fund itself.

Some advisors and brokers get paid through commissions in exchange, theoretically, for advice to the investor, customer, or client. Although you can buy load funds without a formal client-broker relationship, there is no good reason for it.

In general, any investor doing his own research, making his own investment decisions, and making his own purchases or sales of mutual fund shares gains no benefit from buying load funds.

Why Buy a No-Load Fund?

Why buy a no-load fund? You should generally buy no-load funds if you don't use an advisor, but perhaps the most important reason for buying no-loads is to boost your returns by minimizing expenses.

In most cases, no-load funds have lower average expense ratios than load funds, and lower expenses generally translate into higher returns. The expenses to manage the no-load mutual fund portfolio come directly out of the gross returns of the fund.

For example, if a mutual fund has a total return of 10 percent before fees and expenses and a total expense ratio of 1 percent, the investor receives an actual return 9 percent. Now imagine you bought an average large-cap stock fund, which might have an expense ratio of 1.25 percent.

You can easily find a no-load fund with an expense ratio of 0.75 percent or less. This essentially brings a 0.50-percent return advantage each year over a load fund. Over time, this can add up to thousands of dollars of savings and compound interest to the investor that chose the no-load fund over a load fund.

12b-1 Fees in No-Load Funds

You'll find 12b-1 fees collected by some mutual funds to cover marketing, distribution, and service costs. These fees get paid to the broker. The Financial Industry Regulation Authority (FINRA) allows funds to charge as much as 1.00 percent annually as a 12b-1 fee.

A true no-load fund will not charge a 12b-1 fee while the most typical share classes of mutual funds charging such fees include Class B Shares (backload funds) and Class C Shares ("level load" funds).

However, sometimes funds don't charge a load of any kind but still charge a 12b-1 fee. These share classes include Load-Waived Funds and Class R Shares.

Which Is Best, No-load or Load-waived?

Should you use no-load funds or load-waived funds? This is a bit of an apples-to-oranges comparison, but no-load funds generally have lower average expense ratios than load-waived funds. Lower expenses often translate into higher returns for the investor, especially over the long-term.

Therefore no-loads generally make more sense than load-waived funds, at least in terms of lower expenses, which can lead to higher returns.

A true no-load fund does not charge any load or seemingly hidden fees, such as 12b-1 fees. However, load-waived funds do often charge 12b-1 fees. An advisor or broker who gets paid by commission can still make money this way without getting paid the load.

The fund managers accomplish this by removing, or waiving, the load but keeping the 12b-1 fee. Therefore, load-waived funds may sound like a good deal but do your research to make sure you don't buy a fund with a high 12b-1 fee.

You can identify load-waived mutual funds by the "LW" at the end of the fund name. In contrast, no-load funds do not have any letter or letters, such as A, B, C, D, R, or LW, at the end of their fund name indicating a share class.

Learn About Mutual Fund Share Class Types

Which share class type is best for you? Sometimes you will find a particular mutual fund that suits your needs but may not be a no-load or load-waived fund. several different types of mutual fund share classes exist, each with its own advantages and disadvantages, most of which center upon expenses.

For a direct comparison of share classes, see which mutual fund share class is best. The following basic points can inform you on the share class types.

Class A shares generally have front-end sales charges (loads). The load, a charge to pay for the services of an investment advisor or another financial professional, often sits at 5 percent and can be higher. You pay the load when you purchase shares.

For example, if you bought $10,000 of a mutual fund Class A shares, with a load of 5 percent, then you pay $500 as a commission, and you will have a remainder of $9,500 invested in the fund. A shares are best for investors who plan to invest larger dollar amounts and will buy shares infrequently. If the purchase amount is high enough, you may qualify for breakpoint discounts. 

Be sure to inquire about these discounts on the load if you plan to purchase additional shares of the fund or mutual funds within the same fund family.

Class B shares are a share class of mutual funds that do not carry front-end sales charges, but instead, charge a contingent deferred sales charge (CDSC) or back-end load. Class B shares also tend to have higher 12b-1 fees than other mutual fund share classes.

For example, if an investor purchases mutual fund Class B shares, they will not be charged a front-end load but will instead pay a back-end load if the investor sells shares prior to a stated period, such as 7 years, and they may be charged up to 6 percent to redeem their shares.

Class B shares can eventually exchange into Class A shares after seven or eight years. Therefore they may be best for investors who do not have enough to invest to qualify for a break level on the A shares but intend to hold the B shares for several years or more.

Class C shares charge a "level load" annually, usually about 1 percent, and this expense never goes away making C share mutual funds the most expensive for investors who invest and hold for long periods of time.

Therefore, in general, use C shares for short-term (less than 3 years) and use A shares for long-term (more than 8 years), especially if you can get a break on the front-load for making a large purchase. Class B shares can eventually exchange into Class A shares after seven or eight years.

Class D shares are often similar to no-load funds. They represent a mutual fund share class that was created as an alternative to the traditional and more common A share, B share and C share funds that are either front-load, back-load or level-load, respectively.

Advisor shares are only available through an investment advisor, hence the abbreviation "Adv" following the names of funds in this share class. These funds are typically load-waived but can have 12b-1 fees up to 0.50 percent. If you work with an investment advisor or another financial professional, the Adv shares can be your best option because you'll often have lower expenses than B shares or C shares.

Institutional class funds (aka "Inst", Class I, Class X, or Class Y) are generally only available to institutional investors with minimum investment amounts of $25,000 or more. In some cases where investors pool money together, such as 401(k) plans, breakpoints can be met to use the institutional share class funds, which typically have lower expense ratios than other share classes.

R shares do not have a load but they do have 12b-1 fees that typically range from 0.25 percent to 0.50 percent. If your 401(k) only provides R share class funds, your expenses may be higher than if the investment choices included the no-load or load-waived version of the same fund.

Index Funds

Most do-it-yourself investors use index funds and no-load funds with the same fundamental goal of building a portfolio of mutual funds with high-quality, low-cost funds. However, some investors may not be aware that certain index funds also have loads.

It can never be stressed enough that investors should not invest in an index fund with a load. The very purpose of index investing is to passively match the performance of a benchmark index. If the fund has a load, the expense of the sales charge defeats the purpose of the low-cost approach necessary to succeed in the passive investing strategy.

Active Management vs Passive Management

Are actively-managed funds worth paying a load? The advantages for actively-managed funds hinge on the assumption that the portfolio manager can actively pick securities that will outperform a target benchmark.

Because the fund has no requirement to hold the same securities as the benchmark index, it is assumed that the portfolio manager will buy or hold the securities that can outperform the index and avoid or sell those expected to underperform.​

If the fund offers a chance of higher returns than a passive investment strategy may achieve, an investor might think it's worthwhile to pay a load. However, the load effectively reduces the investor's overall return, which may ironically reduce the odds of beating the target benchmark or index.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.