What is a Load and a No-Load Fund?

Definitions and types of mutual funds

In the simplest of terms, a mutual fund is a large group of investors who pool their funds together for a fund manager to invest for them. Typically, all mutual funds come with fees and sales charges. Since 1940, there have been three basic types of mutual funds in the US which include the following:

• closed-end funds – an investment vehicle which involves a limited number of shares available
• open-end funds – referred to as “mutual funds”, these feature the ability to issue and redeem the fund shares any time
• unit investment trusts (UIT’s) – investment companies (US) which typically offer a fixed or unmanaged security portfolio, has a definite lifespan, and which are assembled by sponsors and sold to investors through brokerages

Based on how these fees are charged mutual funds are usually classified into 2 distinct categories – load and no-load funds.

What is the difference between load and no-load mutual funds?

The difference between load and no-load mutual funds is as follows:

Load Mutual Funds – involves charges for shares (or units) when they are purchased, plus any applicable management and operational fees. These will usually range from 4% to 8% of the amount you invest. However, sometimes there is only a flat fee depending on who the fund’s provider is. This amount is typically referred to as a “sales fee” and added to the purchase price of the mutual fund. For example, if you were to purchase a 5% load fund for $1,000, you actually be investing only $950 since $50 of your investment would be the commission paid to the broker.

Load Mutual Funds are broken down into two types – Back-End or “Class B” funds and Front-End or “Class A” funds. Back-End load funds never incur any fees up front. When you cash out the mutual fund, the standard fees will apply. On the other hand, Front-End load funds are just the opposite meaning that you will pay the charges and fees when you initially purchase shares in the fund.

No-Load Mutual Funds – these funds enable investors to purchase shares or units whenever they want to without ever encountering a broker’s commissions or any sales charges. However, certain banks and brokers may have their own company fee schedule whenever you redeem or sell any 3rd party funds.

It is always recommended that you find out in the beginning what type of fund you are investing in since some mutual funds involve shares or units of those funds while others do not. If you are a novice where the investment industry is concerned, you would be wise to hire a financial planner or broker to assist you. Either that or do your own trading online.

If on the other hand, you have educated yourself about the different kinds of mutual funds that are currently available, than No-Load Mutual Funds are the better option as you will not incur any broker’s commissions or fees. Just remember that education is the key whenever you are considering investing in any financial instrument.