A no-load mutual fund does not have a sales charge, called a "load" in investment jargon, but that does not mean it has no fees. All mutual funds have built-in costs that go toward the salaries of the fund's investment advisers. These so-called "carry fees" have the practical effect of reducing the investor's net returns.
Not all carry fees are the same. Some no-load mutual funds have management fees less than 0.5%, while others can be 2.5% or higher. Investors who use a fee-based financial adviser to purchase no-load funds may also see a fee based on total assets invested.
How Mutual Funds Make Money
Mutual funds do not rely on loads, or sales charges, for financing. Loads are paid out to financial intermediaries, such as investment advisers or brokers, to compensate them for their services. Mutual fund providers are largely indifferent to the kind of loads, if any, that are assessed on their products.
Each mutual fund is managed by a professional investment manager and his team. It is the job of the investment manager to buy and sell securities in accordance with the stated objectives of the fund. The fund manager receives a small fee based on the fund's growth. In other words, he makes money when the fund makes money.
One easy way for a fund manager to survive on less fees is to reduce the turnover in the fund portfolio. Investment managers still have to pay fees when they buy and sell shares or bonds in the secondary market. As those fees rise, so too do the carry fees that come with the fund. Depending on the type of fund and how investors purchase it, there may be other expenses assessed that do not depend on the performance of the fund.
FAQs
How do no-load funds make their money? No-load funds make money through management fees and other expenses associated with running the fund. However, their annual expense ratio can be much lower than that of a load mutual fund because no sales charge is collected.
What is an disadvantage of buying a no-load fund? ›
No-load funds generally don't provide investors with investment advice or direction because they don't charge a sales commission. Investors who prefer to work with a financial advisor or who might require assistance with their investment choices may find this to be a disadvantage.
Which is a better choice for you, load or no-load mutual funds? ›
No-load mutual funds have no or low fees while load funds have a sales charge or commission attached. You can purchase no-load funds directly from the company or through a brokerage firm but load funds are sold through an adviser. Some studies show that no-load funds outperform load mutual funds.
What is the primary advantage of a no-load mutual fund? ›
No-load funds do not charge a sales fee or commission as long as you keep your money invested for a specified period, often five years. Sales fees reduce the amount of money invested, which can significantly detract from an investor's profit once compounded interest is taken into account.
How do funds make money? ›
The fund may earn interest and dividend payments from its holdings. The fund may earn capital gains from selling assets held in the fund at a profit. The fund may appreciate, meaning each fund share will grow in value over time.
What fees do no load funds charge? ›
Because there is no transaction fee to invest in a no-load fund, more of the money you put in should be working for you. For example, if you invest $10,000 in a no-load mutual fund, all $10,000 will be invested into the fund.
Is Vanguard a no load fund? ›
Example: Vanguard's no-load funds
One of Vanguard's flagship no-load funds is the Vanguard 500 Index Fund (VFINX -1.71%). This fund is designed to track the performance of the S&P 500 (SNPINDEX:^GSPC) market index, which consists of the 500 largest U.S. companies measured by market capitalization.
What is the no load cost? ›
The no-load cost is calculated by subtracting the incremental cost (unit's economic minimum cost-offer value multiplied by MW value) at the unit's economic minimum point from the total cost (from the heat input at economic minimum value) at the unit's economic minimum point.
What are the pros and cons of a fund? ›
Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.
What is one benefit of investing in a no load fund over a load mutual fund quizlet? ›
A load fund is a mutual fund in which investors pay a commission, for each purchase transaction, that may be as high as ____ percent of the purchase price for investments. One benefit of investing in a no-load fund over a load mutual fund is: with a no-load fund, 100 percent of your investment is used to buy shares.
The typical no-load fund does not carry any letters after its name, though no-load share classes are sometimes tagged as “retail” or “investor” shares. No-load means an investor will not pay a broker to buy and sell their shares, they are able to execute the trades on their own.
Under what circ*mstances would you choose a no load fund over a load fund? ›
If you're investing for the short-term, a no-load fund may be the better choice, as you won't have to pay fees to buy or sell shares. However, if you're investing for the long-term, a load fund may be a better choice, as the fees you pay upfront can be offset by the higher returns you'll receive over time.
Are no load funds passively managed? ›
No-load funds
“If you're buying from a company, you might be a do-it-yourself investor and the fund company receives compensation because you've bought the fund, or you have money in other accounts, so they don't charge sales fees.” Bednar points out that many no-load funds are index funds and passively managed.
Why do no load funds have lower expense ratios? ›
No-load mutual funds have lower expense ratios because they do not charge a sales commission or load fee, resulting in potentially higher returns for investors. Load mutual funds, on the other hand, charge a percentage of the investment as a sales commission.
What is a mutual fund that is no load is purchased at? ›
A no-load fund is usually purchased directly from the investment company offering the fund. Since there is no professional expertise being used to recommend the fund, it is the job of the investor to make their own decisions.
Why are no-load funds free of commissions? ›
A no-load fund is a fund that does not charge a sales load fee. No-load funds are purchased directly through the investment company and do not require an intermediary to act as a broker.
What is an advantage of a load fund? ›
The reason why most investors go for load funds, as opposed to no-load funds, is to compensate the financial intermediary who did the research, recommended, and sold the fund to them.
Are no-load funds passively managed? ›
No-load funds
“If you're buying from a company, you might be a do-it-yourself investor and the fund company receives compensation because you've bought the fund, or you have money in other accounts, so they don't charge sales fees.” Bednar points out that many no-load funds are index funds and passively managed.
What is one benefit of investing in a no-load fund over a load mutual fund quizlet? ›
A load fund is a mutual fund in which investors pay a commission, for each purchase transaction, that may be as high as ____ percent of the purchase price for investments. One benefit of investing in a no-load fund over a load mutual fund is: with a no-load fund, 100 percent of your investment is used to buy shares.
