A no-load mutual fund is a fund that does not charge a fee to investors for buying the fund.
While mutual funds have a variety of fees, a load is a fee specifically to compensate a stock broker or financial advisor for selling you the fund.
A load can be charged upon buying the fund (front end), selling the fund (back end), or steadily throughout the time you own the fund (a level load).
Typically, these three types of loads correspond to share classes denominated A, B, or C. The A-class shares are front end, the B shares are back end and the C shares are level.
The reason for loads are varied, but the fundamental idea is to compensate a salesperson for helping the investor understand the risks and potential rewards of a fund and for effectuating the sale.
A no-load fund, while cheaper, is not “free” to investors. Mutual funds charge a variety of fees, include 12b-1 fees. These fees are charged to offset the cost of marketing a fund to new investors.
In addition, mutual funds charge an expense ratio that is designed to compensate the fund’s managers for selecting securities owned by the fund and its investors.
For instance, a large-cap stock fund might own 40 or 50 different stocks, but which ones at which point in time? Stock selection requires research and that takes time and talent.
The presumption of mutual fund investors is that the managers know how to choose stocks that are appropriate to a given point in the business cycle and to sell them at the right time as well.
That’s why it’s called an “actively managed” fund, as opposed to a passive fund, such as an index fund.
The expectation is that the actively managed mutual fund will outperform the overall market. The alternative is to own a low-cost index fund that simply holds all of the large-company stocks relative to their weight in an index.
Buying a no-load fund can be a good idea if you are confident in your ability to analyze the inner workings of a given fund and its managers. And it can be easy to research the track record of funds against their benchmark indices via services such as Morningstar.
Nevertheless, fund managers come and go and certain funds that hold small numbers of stocks can be difficult to understand relative to one’s own tolerance for risk. That’s when paying a commissioned salesperson can help.
Of course, if the broker or salesperson simply steers you into a given fund in order to collect the commission, that’s hardly a help at all. In that case, you would be better off investing in a no-load fund or an index fund and investing the load cost instead.
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