- Mutual funds have been around in one form or another since the early 1900s. Until very recently, all mutual funds were load funds, meaning they charged a fee or sales charge for their purchase. Today's largest seller of no-load funds is Vanguard. Its first no-load fund was made available in 1977.
- Since many mutual funds are load funds, or have a sales charge, the availability of no-load funds provides a potential means for an investor who is comfortable choosing his own investments to save on the sales charge or commission of a traditionally sold fund. Additionally, since no-load funds are generally sold without a traditional broker, they provide a way for one to invest in mutual funds without the need for either a brokerage account, or a broker.
- A no-load mutual fund is not a free mutual fund. Running a mutual fund takes a substantial amount of overhead. Even an index fund is required to mail various items to shareholders at different times of the year, as well as provide tax statements. Non-index funds have the added cost of a manager to oversee the fund, trading costs, and so on. The load of a mutual fund is a sales charge, and a large portion is generally paid to the firm and the broker who sold the fund and is designed to cover the expense of selling the fund. The expense of running the fund is covered differently, and is usually paid directly from the assets of the fund.
- The cost of running a mutual fund is covered by a fee paid directly from the investments of the fund. This fee is called an expense ratio and has nothing to do with whether or not a fund has a sales charge. Indeed, all funds have some sort of expense charge in order to cover the expenses of running the fund. Always keep separate the cost of selling the fund (load) versus the cost of running the fund (expense ratio).
- The benefit of a mutual fund without sales charges is that it may provide the investor with a better rate of return. The difficulty in this analysis is that mutual funds do not generally invest in the same things at the same time, so while a fund that has a load might outperform a similar fund that does not have a load, this would be due to the success of the investments and not due to the fee structure. From a pure cost perspective, a no-load fund will cost the investor less than a load fund, assuming that the expenses of the funds are equal or lower. This would provide the investor a higher amount of money at the end of the investment assuming equal returns.
- Because no-load funds are traditionally sold without a broker or advisor, one is responsible for choosing and managing their own mutual funds when using no-load funds. An investor should be comfortable doing so before selecting to invest in this type of mutual fund.
